Financially Constrained Carbon Management

Abstract

financially constrained carbon management* m. cecilia bustamante(cid:132) francesca zucchi(cid:133) december 9, 2024 abstract we develop a model studying how financing frictions affect a firm’s carbon footprint and its transition to sustainable technologies while allowing for multiple types of green investment: abatement of carbon emissions, adoption of available technologies, and green innovation. financing frictions impact each type of green investment differently—with abatement unaffected, a negative effect on adoption, and an ambiguous impact on green innovation. financing frictions reduce current emissions by contracting production, but have a negative impact on the transition to greener technologies in firms relying mainly on adoption. we further show that tilting strategies need not boost green innovation, exclusion strategies mainly curb current emissions, and subsidies to adoption also help incentivize green innovation. keywords: carbon emissions; green investment; green transition; financing frictions. jel classification numbers: d62; g31; g32; o31 *we thank vedant agarwal, sebastian gryglewicz, and the seminar participants at essec, the 3rd luxembourg sustainable finance conference, and at the cebra annual meeting at goethe university frankfurt for useful feedback. the views expressed in the paper are those of the authors and should not be interpreted as representing those of the european central bank or the eurosystem. (cid:132)university of maryland. e-mail: …

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