Discussion paper

DP15517 Pollution permits and financing costs

Effective environmental policy should consider how the financiers of polluting firms behave. In a theoretical model describing the periods before and after policy implementation, we show that loan spreads for firms participating in cap-and-trade programs are a function of the costs of compliance and the specific features of the permits markets. With higher permits storage and lower permit prices, firm financing costs fall. Our empirical analysis exploits the dichotomy created by phase III of the EU Emission Trading System, designed to increase and pass the cost of CO2 emissions to the polluters. In contrast with possible program intentions but in line with our theoretical predictions, loan spreads fall by 25% on average starting in 2013. We empirically identify permits storage before program implementation and its associated effect as key drivers of the fall in loan spreads for affected firms, and we show that this dynamic partly undermines the expected reduction in CO2 emissions.


Antoniou, F, M Delis, S Ongena and C Tsoumas (2020), ‘DP15517 Pollution permits and financing costs‘, CEPR Discussion Paper No. 15517. CEPR Press, Paris & London. https://cepr.org/publications/dp15517