Working Paper: CEPR ID: DP15517
Authors: Fabio Antoniou; Manthos Delis; Steven Ongena; Chris Tsoumas
Abstract: Effective environmental policy should consider how the financiers of polluting firms behave. In a theoretical model describing the periods before and after policy implementation, we show that loan spreads for firms participating in cap-and-trade programs are a function of the costs of compliance and the specific features of the permits markets. With higher permits storage and lower permit prices, firm financing costs fall. Our empirical analysis exploits the dichotomy created by phase III of the EU Emission Trading System, designed to increase and pass the cost of CO2 emissions to the polluters. In contrast with possible program intentions but in line with our theoretical predictions, loan spreads fall by 25% on average starting in 2013. We empirically identify permits storage before program implementation and its associated effect as key drivers of the fall in loan spreads for affected firms, and we show that this dynamic partly undermines the expected reduction in CO2 emissions.
Keywords: pollution permits; loan spreads; bond spreads; EU emission trading system; CO2 emissions
JEL Codes: G21; G12; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower costs of compliance (G18) | loan spreads for firms participating in cap-and-trade programs (H81) |
| features of the permits market (D45) | loan spreads for firms participating in cap-and-trade programs (H81) |
| net sellers of permits (Q58) | loan spreads for firms participating in cap-and-trade programs (H81) |
| EU ETS Phase III (Q58) | lender risk (G21) |
| EU ETS Phase III (Q58) | loan spreads for firms participating in cap-and-trade programs (H81) |