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Track T4-2: Climate Finance: Risk and Regulation
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Presentations | ||
Pollution-Shifting vs. Downscaling: How Financial Distress Affects the Green Transition UNC - Chapel Hill We show that firms increase their pollution intensity as they become more financially distressed, particularly in locations with high environmental liability risks. We rationalize these facts using a dynamic model featuring endogenous default and clean and dirty assets. We assume that polluting practices can reduce short-term costs at the expense of exposing firms to persistent liability and regulatory risks. Thus, as firms become more financially distressed, they shift the composition of their assets toward the more polluting ones, akin to a risk-taking motive. Our counterfactuals highlight the limited environmental impact of heightened financing costs as firms intensify their pollution while scaling down.
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