NOTICE: This seminar is canceled
Speaker: Julien Daubanes, University of Geneva (GSEM), MIT (CEEPR), CESifo
A rapidly increasing amount of investments commits firms to undertake climate-friendly projects. Recent empirical evidence shows that certified green bonds have a significant impact on CO2 emissions. Yet little is known about the economic mechanisms of green finance and its possible contribution to climate policy.
This paper develops the first formal analysis of green finance as a climate policy instrument. We examine firms that undertake green and conventional projects, and finance the former through green bonds. Green projects emit less CO2, but they entail costs which stock investors do not directly observe. Our theory holds that green bonds allow firms to signal to stock investors their otherwise unobservable efficiency at controlling their CO2 emissions.
Our model consistently accounts for stylized facts on the recent development of green finance. It explains why firms benefit from green bonds even though these bonds' yield spread is small in practice compared to conventional bonds. The analysis has direct implications for the effective design of climate policy. Like carbon taxation, green finance induces firms to undertake more green projects at the expense of conventional ones. It may further amplify the effect of carbon taxation. Moreover, unlike standard voluntary programs, green finance induces firms to abandon their least efficient conventional projects.
Julien Daubanes: University of Geneva (GSEM), MIT (CEEPR), and CESifo
Jean-Charles Rochet: University of Geneva (GSEM), Swiss Finance Institute, MIT (Sloan), and University of Zurich