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 experience a drop in capital expenditures and investment rates and an increase in pollution rates post Paris. Complementing existing evidence, we find that high-emissions intensity firms issue shorter-maturity bonds but do not see a decrease in yields. This evidence is consistent with a financing friction channel of the ``green paradox". We discuss the possibility of multiple equilibria and what it suggests about how firms respond to the threat of regulation.

Blended finance—the use of public and philanthropic funding to crowd in private

capital—is a potential way to finance a more sustainable world. We provide a conceptual framework that formalizes the decision-making of development finance institutions (DFIs) that engage in blended finance, and provide empirical evidence using deal-level data from a major DFI. Consistent with our conceptual framework, we find that DFIs provide higher concessionality for projects with higher sustainability impact. Moreover, the concessionality is higher for projects in countries with higher political risk

and information asymmetries. In such cases, the blending tends to also include risk

management provisions.

How does climate policy affect productivity and competition? Due to biofuel blending requirements, Swedish diesel prices rose significantly 2007–2020. We analyze how this policy impacted the trucking industry using data on individual vehicles and firms. Large firms responded to higher fuel prices by increasing output per truck, leading to higher revenue, margins and fuel efficiency. Smaller firms showed little change and lost market share. As a result, the Swedish trucking industry was able to lower CO2 emissions by 6% while increasing output by 21%. Investments by large firms in improved logistics was a main driver of productivity gains.