Low-Carbon Investment and Credit Rationing

Abstract This paper develops a principal-agent model with adverse selection to analyse firms’ decisions between an existing carbon-intensive technology and new low-carbon requiring externally funded initial investment. We find that Pigouvian emission tax alone may result in credit rationing under-investment technologies. Combining the interest subsidies or loan guarantees resolves yields first-best outcome. An set above level can also resolve and, some cases, If carbon price is (politically) not feasible, intervention on market promote development. However, such policy second-best The issue of temporary if risks technologies decline. there are social costs delay addressed.