Lasse Heje Pedersen, Copenhagen Business School

"Carbon Pricing versus Green Finance"

Abstract

Economics recommends combating climate change with carbon pricing, but green finance - such as ESG investing and sustainable finance regulations - is becoming widespread. In a unified model, I show how to "translate" a carbon tax into green finance terms and present the following results. First, if carbon prices equal their social cost, green finance should not be used. Second, with too low carbon prices, green finance can implement the social optimum if and only if the cost of capital can be controlled and there are no stranded assets - but the calibrated cost-of-capital adjustments appear unattainable and stranded assets do exist. Third, I show how green finance depends on direct and indirect emissions.