Advanced seminar in Economics - Glenn Rudebusch (Brookings Institution, Hutchins Center on Fiscal & Monetary Policy)

Policymakers and analysts worry that the capital-intensive investments required for a green transition may be curtailed by higher global interest rates and an increased cost of credit. To examine the claim that green technologies and investments are especially sensitive to interest rate increases, we consider the effect of higher interest rates and unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that in fact brown firms, measured either with CO₂ emission levels or intensities, are affected more negatively than green firms by tighter monetary policy and higher interest rates. Higher interest rates may not skew investment away from a sustainable transition.