Greening through finance?

• Published in: Journal of development economics Vol. 152; p. 102683
• Main Authors: Fan, Haichao, Peng, Yuchao, Wang, Huanhuan, Xu, Zhiwei
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.09.2021
• Subjects: Environmental penalty; Firm size; Green credit; Loan rate; Green credit; Firm size; G41; G32; Environmental penalty; K32; Loan rate; Q52
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2021.102683

This paper investigates how green credit regulation affects firms' loan conditions and their economic and environmental performance. In a simple theoretical model, with strengthened green credit regulations, banks raise loan interest rates to nonabatement firms. Firms that were formerly indifferent to pollution abatement must redetermine their abatement and production strategies. Using disaggregated firm-level data, we find that, after the reinforcement of green credit regulation, noncompliant firms saw a larger increase in interest rates, decrease in loan amounts, and more difficulty in access to loans. We further find different impacts on large and small firms in terms of their loans and their financial and economic responses. Regarding the impact on firms’ environmental performance, although all of these firms reduced their total emissions, the reductions are realized in dissimilar ways; large firms reduced their emission intensity by investing more in adopting abatement facilities, while small firms simply choose to produce less. •Green credit regulation increases noncompliant firms' loan cost.•Compared with large firms, small ones are more strongly impacted.•Firms' financial and economic performances are further affected.•Large firms reduce emission through abatement, while small firms produce less.