Carbon taxes and the geography of fossil lending

Abstract

working paper series luc laeven, alexander popov carbon taxes and the geography of fossil lending no 2762 / december 2022 disclaimer: this paper should not be reported as representing the views of the european central bank (ecb). the views expressed are those of the authors and do not necessarily reflect those of the ecb. abstract using data on syndicated loans, we find t hat t he i ntroduction o f a c arbon t ax is associated with an increase in domestic banks’ lending to coal, oil, and gas companies in foreign countries. this effect i s p articularly p ronounced f or b anks w ith l arge prior fossil-lending exposures, suggesting a role for bank specialization. lending to private companies in foreign markets increases relatively more, which points to an intensification of banks’ incentives to avoid public scrutiny. we also find t hat b anks r eallocate a relatively larger share of their fossil loan portfolio to countries with less strict environmental regulation and bank supervision. jel classification: f 3, g 15, g 21, h 23, q5 keywords: carbon taxes, cross-border lending, climate change ecb working paper series no 2762 / december 20221 non-technical summary there is a near-universal consensus among economists that carbon taxes are the most cost-effective tool to reduce carbon emissions and to speed up the green transition. at the same time, few countries in the world tax carbon-intensive activities, and even fewer do so at the required levels. while the implementation of …

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