DP16745 Carbon Taxes and the Geography of Fossil Lending

Author(s): Luc Laeven, Alexander Popov
Publication Date: November 2021
Keyword(s): Carbon taxes, climate change, Cross-border lending
JEL(s): G15, G21, H23, Q5
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16745

Using data on syndicated loans, we find that the introduction of a carbon tax is associated with an increase in domestic banks' lending to coal, oil, and gas companies in foreign countries. This effect is particularly pronounced for banks with large prior fossil-lending exposures, while bank capital and profitability do not play a role. In addition, banks reallocate a relatively larger share of their fossil loan portfolio to countries without a carbon tax. Our findings speak to the importance of a global carbon tax to prevent the reallocation of carbon emissions across national borders via financial markets.