Climate Finance, Innovation and Challenges for Policy

Who engages in green R&D and how is corporate behavior affected by green technical progress? Based on global patent filings, corporate financial reporting, and corporate carbon emissions we analyze corporate green and brown R&D activity and its effects in reducing carbon emissions. We find consistent support for the path-dependence hypothesis of innovation. In each sector around the world innovating companies with higher carbon emissions tend to engage more in brown R&D and less in green R&D. Despite a consistent rise in the share of green R&D over our sample period we find little effect of green innovation on future carbon emissions. Direct emissions of green innovating companies are not significantly affected by green innovation across all sectors and around the world, whether in the short term (one year after filing a green patent) or in the medium term (three years after filing). However, we find weak evidence of a small reduction in indirect upstream emissions following green patent filings.

To the extent that firms don't internalise the negative externalities of their CO2 emissions, government intervention is needed to curb global warming. We study the equilibrium interaction between firms, which can invest in green technologies, and government, which can impose emission caps but has limited commitment power. Two types of equilibria can arise: If firms anticipate caps, they invest in green technologies. These investments have positive spillover effects, lowering the aggregate cost of emission reductions for all firms, thus making the government willing to cap emissions. If  firms anticipate no caps, they don't invest in green technologies, and the government finds it too costly to cap emissions. A large fund, engaging with firms' management to foster investment in green technologies, can tilt equilibrium towards emission caps.

This paper studies the impact of current expectations about long-term climate change damage on sovereign bond yields. Sovereign bond yields are particularly important from a policy perspective, as most climate change mitigation decisions are taken at the national level, and borrowing cost today may serve as a disciplining device. We use scientific projections of climate change damage, and compare the spread in yields between long and short term bonds. We find that projected climate change damage has large effects on yields for bonds with long maturities, but not for short term maturity bonds. The effect of projected climate change damage is monotonically increasing in maturity. We discuss the broader asset pricing and macroeconomics effects implied by our results.

In the presence of financial frictions, optimal emissions taxes may be below the
Pigouvian benchmark (equal to the social cost of emissions) if emissions taxes and
abatement costs amplify financial constraints, or above the Pigouvian benchmark if physical climate risks have a substantial impact on collateral values. With non-
Pigouvian emissions taxes borrowers generally do not correctly internalize the effect of their leverage on welfare through emissions, and consequently welfare can be
improved by complementing emissions taxes with leverage regulation.

Investment in adaptation is a critical channel to reduce the damage from climate change, yet there is limited evidence about its effectiveness and costs. We exploit the activation of a sea wall to protect the city of Venice from increasingly high tides to provide new evidence on the capitalization of infrastructure investment in climate change adaptation into housing values. Exploiting variation in the activation of the sea wall – based on expected tides – as well as in the exposure of different properties – based on characteristics (ground vs higher floors, stilts elevation) – we find that the sea wall increases house prices by 3% for properties above the activation threshold and by an additional 6% for ground-floor properties. Overall, the sea wall generates e350 millions in additional residential properties value, which corresponds to 2.2% of the value of the total residential housing stock in Venice. Infrastructure investment in climate change adaptation lowers the riskiness of real estate exposed to high tides and sea level rise.