The impact of the real interest rate on green investment: evidence from the United States
Abstract
Monetary policy has an impact on CO2 emissions which is not entirely understood in the literature. Whereas there is a consensus that the impact is indirect through investments, the literature does not investigate the impact of monetary policy on (green) investments. Additionally, we argue in this paper that monetary policy can have a different impact on ‘green’ investments and ‘brown’ investments. This paper focuses, therefore, on the impact of monetary policy on investments. In particular, this paper empirically investigates whether the real interest rate has a different effect on green investment, compared to general investment, using quarterly data from the United States between 2004 and 2020. The results from the autoregressive distributed lag model show that the real interest rate is negatively related to the ratio of green investment relative to total investment. This result emphasizes the importance of the green investment effect channel and suggests that monetary policy has an unintentional role in climate policy which should be considered by policy makers.
Keyword : green investment, brown investment, interest rate, monetary policy, climate policy, USA
How to Cite
Van Den Engel, A., Swart, J., & Schramm, M. (2024). The impact of the real interest rate on green investment: evidence from the United States. Journal of Business Economics and Management, 25(5), 939–959. https://doi.org/10.3846/jbem.2024.22363
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Chishti, M. Z., Ahmad, M., Rehman, A., & Khan, M. K. (2021). Mitigations pathways towards sustainable development: Assessing the influence of fiscal and monetary policies on carbon emissions in brics economies. Journal of Cleaner Production, 292, Article 126035. https://doi.org/10.1016/j.jclepro.2021.126035
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Glemarec, Y., & Connelly, C. (2011). Catalysing climate finance: A guidebook on policy and financing options to support green, low-emission and climate-resilient development. United Nations Development Programme. (undp.org)
Isiksal, A. Z., Samour, A., & Resatoglu, N. G. (2019). Testing the impact of real interest rate, income, and energy consumption on Turkey’s CO2 emissions. Environmental Science and Pollution Research, 26(20), 20219–20231. https://doi.org/10.1007/s11356-019-04987-5
Latif, N. W. A., Abdullah, Z., & Razdi, M. A. M. (2015). An autoregressive distributed lag (ARDL) analysis of the nexus between savings and investment in the three Asian economies. The Journal of Developing Areas, 49(3), 323–334. https://doi.org/10.1353/jda.2015.0154
Monasterolo, I., & Raberto, M. (2018). The EIRIN flow-of-funds behavioural model of green fiscal policies and green sovereign bonds. Ecological Economics, 144, 228–243. https://doi.org/10.1016/j.ecolecon.2017.07.029
Muhafidin, D. (2020). The role of fiscal policy and monetary policy in environmental degradation in Indonesia. International Journal of Energy Economics and Policy, 10(3), Article 504. https://doi.org/10.32479/ijeep.9586
Narayan, P. K. (2004). Fiji’s tourism demand: the ardl approach to cointegration. Tourism Economics, 10(2), 193–206. https://doi.org/10.5367/000000004323142425
Nunes, L. C., Newbold, P., & Kuan, C.-M. (1997). Testing for unit roots with breaks: evidence on the great crash and the unit root hypothesis reconsidered. Oxford Bulletin of Economics and Statistics, 59(4), 435–448. https://doi.org/10.1111/1468-0084.00076
Olsson, R. (2005, May 30). Implications of constant growth of abnormal earnings in perpetuity for equity premia, discount rates, earnings, dividends, book values and key financial ratios. An extension of Claus and Thomas. SSRN. https://doi.org/10.2139/ssrn.333220
Pradeep, S. (2022). Role of monetary policy on CO2 emissions in India. SN Business & Economics, 2(1), 1–33. https://doi.org/10.1007/s43546-021-00175-1
Qingquan, J., Khattak, S. I., Ahmad, M., & Ping, L. (2020). A new approach to environmental sustainability: Assessing the impact of monetary policy on CO2 emissions in Asian economies. Sustainable Development, 28(5), 1331–1346. https://doi.org/10.1002/sd.2087
Sherlock, M. F. (2017). The renewable electricity production tax credit: In brief. Congressional Research Service. https://www.hydro.org/wp-content/uploads/2017/08/CRS-on-Renewable-Electricity-Production-Credit.pdf
Shobande, O. A. (2022). Is climate change a monetary phenomenon? Evidence from time series analysis. International Journal of Sustainable Development & World Ecology, 29(2), 99–111. https://doi.org/10.1080/13504509.2021.1920064
Stern, N. (2008). The economics of climate change. American Economic Review, 98(2), 1–37. https://doi.org/10.1257/aer.98.2.1
The World Bank. (2022). CO2 emissions (kt) – United States. https://data.worldbank.org/indicator/EN.ATM.CO2E.KT?locations=US
Tran, T., Do, H., Vu, T., & Do, N. (2020). The factors affecting green investment for sustainable development. Decision Science Letters, 9(3), 365–386. https://doi.org/10.5267/j.dsl.2020.4.002
U.S. Bureau of Economic Analysis. (2022a). Gross domestic product per capita [a939rc0q052sbea]. Retrieved May 30, 2022, from https://fred.stlouisfed.org/series/A939RC0Q052SBEA
U.S. Bureau of Economic Analysis. (2022b). Gross private domestic investment [na000335q]. Retrieved May 31, 2022, from https://fred.stlouisfed.org/series/NA000335Q
U.S. Bureau of Economic Analysis. (2022c). Population [b230rc0q173sbea]. Retrieved April 28, 2022, from https://fred.stlouisfed.org/series/B230RC0Q173SBEA
U.S. Bureau of Economic Analysis. (2024). Corporate profits with inventory valuation and capital consumption adjustments. Retrieved April 27, 2024, from https://fred.stlouisfed.org/graph/?g=1r7co
U.S. Bureau of Labour Statistics. (2022). Producer price index by commodity: Fuels and related products and power: Crude petroleum (domestic production) [wpu056]. Retrieved April 28, 2022, from https://fred.stlouisfed.org/series/WPU056
U.S. Energy Information Administration. (2013). Feed-in tariff: A policy tool encouraging deployment of renewable electricity technologies. https://www.eia.gov/
U.S. Energy Information Administration. (2022). U.S. energy facts explained. https://www.eia.gov/energyexplained/us-energy-facts/
U.S. Energy Information Administration. (2024). Total fossil fuels co2 emissions. Retrieved April 27, 2024, from https://www.eia.gov/
Altaghlibi, M., van Tilburg, R., & Sanders, M. (2022). How much of a help is a green central banker? (Working paper). Sustainable Finance Lab. https://sustainablefinancelab.nl/wp-content/uploads/sites/334/2022/02/20220215WOR-How-much-of-a-help-is-a-green-banker-10.pdf
Annicchiarico, B., & Di Dio, F. (2017). GHG emissions control and monetary policy. Environmental and Resource Economics, 67(4), 823–851. https://doi.org/10.1007/s10640-016-0007-5
Arena, C., Michelon, G., & Trojanowski, G. (2018). Big egos can be green: A study of CEO hubris and environmental innovation. British Journal of Management, 29(2), 316–336. https://doi.org/10.1111/1467-8551.12250
Azhgaliyeva, D., Beirne, J., & Mishra, R. (2023). What matters for private investment in renewable energy? Climate Policy, 23(1), 71–87. https://doi.org/10.1080/14693062.2022.2069664
Azhgaliyeva, D., Kapsaplyamova, Z., & Low, L. (2018). Implications of fiscal and financial policies for unlocking green finance and green investment (ADBI Working Paper, 861). Asian Development Bank Institute (ADBI), Tokyo. https://hdl.handle.net/10419/190282
Barabanov, S., Basnet, A., Walker, T. J., Yuan, W., & Wendt, S. (2021). Firm- and country-level determinants of green investments: An empirical analysis. Managerial Finance, 47(11), 1672–1692. https://doi.org/10.1108/MF-06-2020-0311
Barradale, M. J. (2010). Impact of public policy uncertainty on renewable energy investment: Wind power and the production tax credit. Energy Policy, 38(12), 7698–7709. https://doi.org/10.1016/j.enpol.2010.08.021
Bartocci, A., Natarprieta, A., & Pisani, M. (2024). “Green” fiscal policy measures and nonstandard monetary policy in the euro area. Economic Modelling, 136, Article 106743. https://doi.org/10.1016/j.econmod.2024.106743
Bashir, M. F., Rao, A., Sharif, A., Ghosh, S., & Pan, Y. (2023). How do fiscal policies, energy consumption and environmental stringency impact energy transition in the G7 economies: Policy implications for the COP28. Journal of Cleaner Production, 434, Article 140367. https://doi.org/10.1016/j.jclepro.2023.140367
Bento, N., Borello, M., & Gianfrate, G. (2020). Market-pull policies to promote renewable energy: A quantitative assessment of tendering implementation. Journal of Cleaner Production, 248, Article 119209. https://doi.org/10.1016/j.jclepro.2019.119209
Bloomberg. (2022). Charting renewable energy investment by country. https://www.bloomberg.com/graphics/climate-change-data-green/investment.html.
Chan, Y. T. (2020). Are macroeconomic policies better in curbing air pollution than environmental policies? A dsge approach with carbon-dependent fiscal and monetary policies. Energy Policy, 141, Article 111454. https://doi.org/10.1016/j.enpol.2020.111454
Chishti, M. Z., Ahmad, M., Rehman, A., & Khan, M. K. (2021). Mitigations pathways towards sustainable development: Assessing the influence of fiscal and monetary policies on carbon emissions in brics economies. Journal of Cleaner Production, 292, Article 126035. https://doi.org/10.1016/j.jclepro.2021.126035
Cox, M., Brown, M. A., & Sun, X. (2013). Energy benchmarking of commercial buildings: A low-cost pathway toward urban sustainability. Environmental Research Letters, 8(3), Article 035018. https://doi.org/10.1088/1748-9326/8/3/035018
Dikau, S., & Volz, U. (2023). Out of the window? Green monetary policy in China: Window guidance and the promotion of sustainable lending and investment. Climate Policy, 23(1), 122–137. https://doi.org/10.1080/14693062.2021.2012122
Di Luccio, S. (2023). High interest rates are undermining the green transition. Positive Money Europe. positivemoney.org
Eyraud, L., Clements, B., & Wane, A. (2013). Green investment: Trends and determinants. Energy Policy, 60, 852–865. https://doi.org/10.1016/j.enpol.2013.04.039
Federal Reserve Bank of Chicago. (2024). National financial conditions index nonfinancial leveral subindex. Retrieved April 28, 2022, from https://fred.stlouisfed.org/series/NFCINONFINLEVERAGE
Federal Reserve Bank of Cleveland. (2022). 10-year real interest rate [reaintratrearat10y]. Retrieved April 28, 2022, from https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
Federal Reserve Economic Data. (2022). What dates are used for the u.s. recession bars? https://fredhelp.stlouisfed.org/fred/data/understanding-the-data/recession-bars/
Frankfurt School-UNEP Centre/BNEF. (2020). Global trends in renewable energy investment 2020. UN Environment Program (UNEP), Frankfurt School (FS-UNEP), Bloomberg NEF (BNEF). GTR_2020.pdf (fs-unep-centre.org)
Glemarec, Y., & Connelly, C. (2011). Catalysing climate finance: A guidebook on policy and financing options to support green, low-emission and climate-resilient development. United Nations Development Programme. (undp.org)
Isiksal, A. Z., Samour, A., & Resatoglu, N. G. (2019). Testing the impact of real interest rate, income, and energy consumption on Turkey’s CO2 emissions. Environmental Science and Pollution Research, 26(20), 20219–20231. https://doi.org/10.1007/s11356-019-04987-5
Latif, N. W. A., Abdullah, Z., & Razdi, M. A. M. (2015). An autoregressive distributed lag (ARDL) analysis of the nexus between savings and investment in the three Asian economies. The Journal of Developing Areas, 49(3), 323–334. https://doi.org/10.1353/jda.2015.0154
Monasterolo, I., & Raberto, M. (2018). The EIRIN flow-of-funds behavioural model of green fiscal policies and green sovereign bonds. Ecological Economics, 144, 228–243. https://doi.org/10.1016/j.ecolecon.2017.07.029
Muhafidin, D. (2020). The role of fiscal policy and monetary policy in environmental degradation in Indonesia. International Journal of Energy Economics and Policy, 10(3), Article 504. https://doi.org/10.32479/ijeep.9586
Narayan, P. K. (2004). Fiji’s tourism demand: the ardl approach to cointegration. Tourism Economics, 10(2), 193–206. https://doi.org/10.5367/000000004323142425
Nunes, L. C., Newbold, P., & Kuan, C.-M. (1997). Testing for unit roots with breaks: evidence on the great crash and the unit root hypothesis reconsidered. Oxford Bulletin of Economics and Statistics, 59(4), 435–448. https://doi.org/10.1111/1468-0084.00076
Olsson, R. (2005, May 30). Implications of constant growth of abnormal earnings in perpetuity for equity premia, discount rates, earnings, dividends, book values and key financial ratios. An extension of Claus and Thomas. SSRN. https://doi.org/10.2139/ssrn.333220
Pradeep, S. (2022). Role of monetary policy on CO2 emissions in India. SN Business & Economics, 2(1), 1–33. https://doi.org/10.1007/s43546-021-00175-1
Qingquan, J., Khattak, S. I., Ahmad, M., & Ping, L. (2020). A new approach to environmental sustainability: Assessing the impact of monetary policy on CO2 emissions in Asian economies. Sustainable Development, 28(5), 1331–1346. https://doi.org/10.1002/sd.2087
Sherlock, M. F. (2017). The renewable electricity production tax credit: In brief. Congressional Research Service. https://www.hydro.org/wp-content/uploads/2017/08/CRS-on-Renewable-Electricity-Production-Credit.pdf
Shobande, O. A. (2022). Is climate change a monetary phenomenon? Evidence from time series analysis. International Journal of Sustainable Development & World Ecology, 29(2), 99–111. https://doi.org/10.1080/13504509.2021.1920064
Stern, N. (2008). The economics of climate change. American Economic Review, 98(2), 1–37. https://doi.org/10.1257/aer.98.2.1
The World Bank. (2022). CO2 emissions (kt) – United States. https://data.worldbank.org/indicator/EN.ATM.CO2E.KT?locations=US
Tran, T., Do, H., Vu, T., & Do, N. (2020). The factors affecting green investment for sustainable development. Decision Science Letters, 9(3), 365–386. https://doi.org/10.5267/j.dsl.2020.4.002
U.S. Bureau of Economic Analysis. (2022a). Gross domestic product per capita [a939rc0q052sbea]. Retrieved May 30, 2022, from https://fred.stlouisfed.org/series/A939RC0Q052SBEA
U.S. Bureau of Economic Analysis. (2022b). Gross private domestic investment [na000335q]. Retrieved May 31, 2022, from https://fred.stlouisfed.org/series/NA000335Q
U.S. Bureau of Economic Analysis. (2022c). Population [b230rc0q173sbea]. Retrieved April 28, 2022, from https://fred.stlouisfed.org/series/B230RC0Q173SBEA
U.S. Bureau of Economic Analysis. (2024). Corporate profits with inventory valuation and capital consumption adjustments. Retrieved April 27, 2024, from https://fred.stlouisfed.org/graph/?g=1r7co
U.S. Bureau of Labour Statistics. (2022). Producer price index by commodity: Fuels and related products and power: Crude petroleum (domestic production) [wpu056]. Retrieved April 28, 2022, from https://fred.stlouisfed.org/series/WPU056
U.S. Energy Information Administration. (2013). Feed-in tariff: A policy tool encouraging deployment of renewable electricity technologies. https://www.eia.gov/
U.S. Energy Information Administration. (2022). U.S. energy facts explained. https://www.eia.gov/energyexplained/us-energy-facts/
U.S. Energy Information Administration. (2024). Total fossil fuels co2 emissions. Retrieved April 27, 2024, from https://www.eia.gov/