2026/02/08 by LASSE HEJE PEDERSEN
Economics, Econometrics and Finance · Business, Management and Accounting · #Sustainable Finance and Green Bonds #Climate Change Policy and Economics #Corporate Social Responsibility Reporting
paper · doi:10.1111/jofi.70022
ABSTRACT Green finance—including environmental, social, and governance investing and sustainable finance regulations—is widespread, but can it substitute for carbon pricing in fighting climate change? In a unified model, I show that (i) when carbon prices reflect the social cost of carbon, green finance should not be used; (ii) when carbon prices are too low, green finance can implement the social optimum if each firm's cost of capital can be set to its sustainable discount rate , which increases with the ratio of carbon emissions to firm value. I provide calibrations, analyze stranded assets, and present implementations through subsidies or preferential financing for green firms.