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Greening (runnable) brown assets with a liquidity backstop

Summary:
Eric Jondeau, Benoit Mojon and Cyril Monnet in this new BIS paper: In anticipation of a risk of runs on brown assets and a resulting pooling equilibrium, low- and high-emissions firms are not easily differentiated by external investors. As a result, all firms face the same initial funding costs ahead of production, and some high-emissions firms will be unable to subsequently refinance their activity because investors will not take the risk of financing them. The findings also show that a liquidity backstop – whose pricing takes the form of an access fee proportional to carbon emissions, and a borrowing rate that is independent of carbon emissions – helps in greening the economy, re-establishing production efficiency, while avoiding runs. The access fee incentivises the highest

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Eric Jondeau, Benoit Mojon and Cyril Monnet in this new BIS paper:

In anticipation of a risk of runs on brown assets and a resulting pooling equilibrium, low- and high-emissions firms are not easily differentiated by external investors. As a result, all firms face the same initial funding costs ahead of production, and some high-emissions firms will be unable to subsequently refinance their activity because investors will not take the risk of financing them.

The findings also show that a liquidity backstop – whose pricing takes the form of an access fee proportional to carbon emissions, and a borrowing rate that is independent of carbon emissions – helps in greening the economy, re-establishing production efficiency, while avoiding runs. The access fee incentivises the highest emissions firms to opt for cleaner technologies and to reduce their output while greener firms increase their scale of production.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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