ECB report shows how banks dilute carbon pricing’s impact on an economy by allocating capital elsewhere (2)

Banks dilute the impact of carbon pricing by directing capital to other countries when a nation installs policies that would make polluters pay.

“Following an exogenous increase in the price of carbon in the domestic market, banks reduce their fossil lending at home and increase it abroad.”

“Two years after a country adopts a carbon tax, domestic (foreign) fossil lending by banks domiciled in this country is 1.4% lower (8.5% higher). This effect is statistically significant and remarkably robust.”

“A carbon price, while socially optimal in that it minimizes the discounted social cost of the transition to clean capital, may prompt the premature retirement of existing polluting capacities (Rozenberg, Vogt-Schilb, and Hallegatte, 2020).

This can be associated with significant private costs in the form of stranded assets, which
lowers the return on stranded assets. This in turn lowers the demand for loans for legacy
projects. Consequently, as the demand for fossil lending at home declines, banks can be
expected to increase their credit supply to fossil companies abroad.”

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Why carbon pricing is important Input: Explain why carbon pricing is important

Carbon pricing is a policy tool that puts a price on carbon dioxide (CO2) emissions, which are a major contributor to climate change.

It is designed to incentivize the reduction of CO2 emissions by making it more expensive to emit them.

The goal of carbon pricing is to encourage the use of cleaner, low-carbon technologies and practices, and to reduce greenhouse gas emissions that contribute to climate change.

There are several reasons why carbon pricing is considered important:

  1. Carbon pricing can be an effective way to reduce greenhouse gas emissions. By making it more expensive to emit CO2, carbon pricing creates an incentive for businesses and individuals to reduce their emissions and adopt low-carbon alternatives.
  2. Carbon pricing can generate revenue. Governments can use the revenue generated from carbon pricing to fund clean energy and other climate-related initiatives, or to compensate individuals and businesses that are affected by the policy.
  3. Carbon pricing can help to level the playing field between low-carbon and high-carbon technologies. Without carbon pricing, companies and individuals that emit high levels of CO2 may have an unfair advantage over those that use cleaner technologies. Carbon pricing can help to correct this imbalance by making it more expensive to emit CO2, which makes low-carbon alternatives more competitive.
  4. Carbon pricing can encourage innovation and the development of clean technologies. By creating a financial incentive for the reduction of CO2 emissions, carbon pricing can stimulate the development of new technologies and practices that can help to reduce emissions.

Overall, carbon pricing is an important policy tool that can help to reduce greenhouse gas emissions, generate revenue, level the playing field between low-carbon and high-carbon technologies, and encourage innovation in the clean energy sector.

Here is a key snip of the report

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