Green financing for the establishment of renewable resources under carbon emission regulation

Abstract

This study examined the problem of renewable resource investment under the carbon emission regulation for a capital-constrained resource firm who may ask a bank for green financing. The following three models were established: pure conventional resource, pure renewable resource, and hybrid resource strategies. The study first explored the optimal pricing decisions and the optimal renewable investment level, and then analyzed the impact of green financing interest rate and the firm's initial working capital. Finally, it compared the dominances among the three strategies. The results show that (1) the hybrid strategy dominates the two pure strategies, while the dominance of the two pure strategies depends on the market environment; (2) under the hybrid strategy, the impact of green financing interest rate on the investment to the renewable resource establishment is mediated by the carbon emission quota. Interestingly, when the carbon emission quota is moderate, the more renewable resource will be invested if the green financing interest rate becomes lower. (3) The local government should know that the initial financial status of the resource firm has a positive effect on the firm's net profit, but it may be harmful to the overall social welfare. The recommendations for the firm are the following: (1) It is beneficial to set a low sales price if the initial capital is high and reverse otherwise; and (2) the sales price should be reduced in accordance with the lower green finance interest rate.