We analyze jointly optimal carbon pricing and financial policies under finan- cial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on whether physical climate risks have a substantial impact on collateral values. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system or green subsidies may dominate emissions taxes because they can be designed to have a less adverse effect on financial constraints. Additionally introducing leverage regulation can be welfare-improving if environmental policies have a direct negative effect on financial constraints. Furthermore, our analysis highlights the positive effect of carbon price hedging markets on equilibrium environmental policies. 

This entry is a one-file data package totaling 522.6 KB, containing a file in .pdf format.If you use this dataset, please cite: Dottling, Robin; Rola-Janicka, Magdalena (2023). Too Levered for Pigou: Carbon Pricing, Financial Constraints, and Leverage Regulation. Erasmus University Rotterdam (EUR). Preprint. https://doi.org/10.25397/eur.22147256