Working Paper: CEPR ID: DP18541
Authors: Carlo Altavilla; Miguel Boucinha; Marco Pagano; Andrea Polo
Abstract: Combining euro-area credit register and carbon emission data, we provide evidence of a climate risk-taking channel in banks’ lending policies. Banks charge higher interest rates to firms featuring greater carbon emissions, and lower rates to firms committing to lower emissions, controlling for their probability of default. Both effects are larger for banks committed to decarbonization. Consistently with the risk-taking channel of monetary policy, tighter policy induces banks to increase both credit risk premia and carbon emission premia, and reduce lending to high emission firms more than to low emission ones. While restrictive monetary policy increases the cost of credit and reduces lending to all firms, its contractionary effect is milder for firms with low emissions and those that commit to decarbonization.
Keywords: lending; climate risk; carbon emissions; interest rate; monetary policy
JEL Codes: E52; G21; Q52; Q53; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher carbon emissions (Q54) | increased interest rates (E43) |
| banks' commitments to environmentally responsible lending policies (G21) | higher climate risk premium for high-emission firms (Q54) |
| firms' commitment to reducing emissions (Q52) | less severe contractionary effect of monetary policy on lending (E49) |
| tighter monetary policy (E52) | increase in credit risk premia (E44) |
| tighter monetary policy (E52) | increase in carbon emission premia (Q54) |
| tighter monetary policy (E52) | reduction in lending to high-emission firms (G21) |