ECB research: global carbon tax needed to reduce fossil fuel funding

Research conducted by economists Luc Laeven and Alexander Popov at the European Central Bank suggests that banks could relocate their fossil fuel portfolios in response to carbon taxes. The findings show that when the price of carbon increases in the domestic market, “banks reduce their lending to coal, oil and gas companies at home and increase such fossil lending abroad”. On average, the model suggests that, in response to a carbon tax, foreign fossil fuel lending increases by 6.8% while domestic fossil fuel lending decreases by about 0.4%. Further, the research suggests that this reallocation is more likely to be seen in banks that exhibit a comparative advantage in lending to the fossil fuel sector. The key policy implication of the paper is that a coordinated global carbon tax is critical: “To engineer a meaningful reduction in the funding of fossil companies, a carbon tax needs to be global.”