The preferential treatment of green bonds

• Published in: Review of economic dynamics Vol. 51; pp. 657 - 676
• Main Authors: Giovanardi, Francesco, Kaldorf, Matthias, Radke, Lucas, Wicknig, Florian
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.12.2023
• Subjects: Climate policy; Collateral framework; Green investment; Green investment; E63; E44; Q58; Collateral framework; E58; Climate policy
• ISSN: 1094-2025; 1096-6099
• DOI: 10.1016/j.red.2023.06.006

We study the preferential treatment of green bonds in the central bank collateral framework as a climate policy instrument within a DSGE model with climate and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral, subject to haircuts determined by the central bank. A haircut reduction induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by a haircut gap of 20 percentage points, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal carbon taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds. •Studies the preferential collateral treatment of green bonds in an E-DSGE model.•Preferential treatment increases welfare, but its effects are quantitatively small.•Financial frictions make preferential treatment imperfect substitute of carbon tax.•Under optimal carbon taxes, there is no scope for preferential treatment.