Green Investment, Inequality and Misallocation

I propose a simple framework that accounts for many poverty-related empirical results in the literature on green investment and explains why ensuring a level playing field between the poor and the rich improves the economic and environmental efficiency of green investments. I depart from the traditional margin-based approach and focus on frictions. The poor have higher present biases and face higher interest rates, but under simplifying assumptions, the latter alone are important when deciding whether to invest in a green durable good. Non-discriminating subsidies favor the rich, who are more likely to choose green durable goods, but they incentivize the poor more strongly. Only full subsidies (i.e., subsidies that fully compensate for the initial price difference between green and brown durable goods) can ensure full allocative efficiency and fairness. Such full subsidies induce the systematic choice of the green durable good and are therefore not compatible with a positive private, social or environmental discount rate. The latter is defined as a social discount rate consistent with the net-zero target: it is lower than usual social discount rates, but is still positive in the presence of carbon capture technologies. Credit policies can ensure the allocative efficiency and fairness of a decentralized equilibrium over a wider range of situations.

Allocative efficiency · Economic efficiency · Economic surplus · Green Consumption · Inequality · Subsidy · Climate Change Policy and Economics · Energy, Environment, and Transportation Policies · Sustainable Development and Environmental Policy