Robin Döttling

We analyze optimal carbon pricing under financial constraints and endogenous climate-related transition and physical costs. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on the strength of physical climate impacts on pledgeable resources. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system may dominate emissions taxes because it can be designed to have a less adverse effect on financial constraints. We also assess how capital structure, carbon price hedging markets, and socially responsible investors interact with emissions pricing, and evaluate other commonly used policy tools.

We document that the stock prices of firms with higher carbon emissions respond more to monetary policy shocks around Federal Open Market Committee announcements. Theoretically, we show that greater emissions-reduction needs can explain high-emission firms’ heightened sensitivity to monetary policy. Consistent with this channel, we find that (i) the valuation results are stronger among capital-intensive and highly levered firms and (ii) high-emission firms reduce emissions relatively faster on average, but disproportionately slow down these efforts when monetary policy is restrictive. We also examine bond price responses to monetary policy shocks to assess the relevance of differential discount rate effects.

How does the zero lower bound on deposit rates (ZLB) affect how banks respond to capital regulation? I study this question in a model in which households value the liquidity services of deposits yet do not accept negative deposit rates. When deposit rates are constrained by the ZLB, tight capital requirements disproportionately hurt franchise values and are therefore less effective in curbing excessive risk taking. The model delivers a novel rationale for "interest-dependent" capital regulation that is optimally laxer when the ZLB binds and tighter when the ZLB is slack but may bind in the future.