Abstract: Using US firm-level data, we document significant differences in pollution abatement activities over the life cycle of firms. Under financial constraints, smaller and younger firms invest more in capital and engage less in pollution abatement; as they accumulate more net worth, their abatement activities accelerate, and their emission intensity reduces. Motivated by thisevidence, we develop and quantify a heterogeneous firm model to study the relation between financial frictions, capital investment, and pollution abatement. In the model, smaller and younger firms prefer capital investment over pollution abatement because the returns from the former are higher than those from the latter. More importantly, we show financial frictions make environmental regulation sub-optimal at any level: they reduce aggregate welfare gain by 40%. Finally, we show that even without monitoring, green loan policies are considerably effective in reducing emission intensity.
Discussant: Bo Bian, University of British Columbia
Abstract: We study the investment decisions of polluting firms in response to climate regulation risks. We build a model of firm financing and investment that predicts higher investment prior to a regulatory shock for firms more exposed to the shock, and higher borrowing costs after the regulatory shock. In our empirical analysis, using the Paris Climate Accord as a shock to future climate regulation, we find evidence consistent with the model. High-emissions intensity firms issue shorter-maturity bonds post Paris but do not see a decrease in yields, experience a drop in capital expenditures and investment rates, and see an increase in pollution rates. Our findings show that high-emissions intensity firms that expect financing frictions to intensify under climate regulation shocks can exhibit behavior consistent with a ``green paradox," where polluting firms increase ex ante investment in the expectation of future climate regulation. We discuss the possibility of multiple equilibria and what it suggests about how firms respond to the threat of regulation.
Discussant: Lee Seltzer, Federal Reserve Bank of New York
Aymeric Bellon, University of North Carolina-Chapel Hill
Yasser Boualam, University of Pennsylvania
Abstract: We show that firms increase their pollution intensity as they become more financiallydistressed. This is particularly the case in high-environmental liability risk locations, akinto a risk-taking motive. We rationalize these facts by calibrating a dynamic model featuringendogenous default, and dirty vs. clean investment. Dirty assets reduce short-termcosts but expose firms to persistent liability and regulatory risks. Thus, as firms becomemore financially distressed, they gradually take on more risk and shift the composition oftheir assets toward the more polluting ones. Our counterfactuals highlight the limited environmentalimpact of blanket divestments when heightened financing costs lead firms toincrease their pollution intensity while scaling down. Tilting strategies, however, are moreeffective at tapering pollution.
Discussant: Deeksha Gupta, Johns Hopkins University
