Order financing for promoting green transition

Abstract

Green finance plays a key role to drive the green transition, which is popular in both developed and developing countries. Different from direct financial subsidies, order financing, an emerging type of green finance, mainly contributes to the improvement of supervision mechanisms and the effectiveness of incentive mechanisms. This study focuses on the effects of order financing by considering carbon taxes. Based on game theory model, three major findings from the theoretical analysis are obtained. First, whether the firm launches a green transition or not mainly depends on the efficiency of clean technology, carbon taxes, marginal costs of energy, and the elasticity of effective energy input. Second, order financing encourages more firms to engage in green transition than mortgage financing does. With order financing, more firms can invest in clean technologies. Third, price fluctuation risk restricts the supply of order financing and the application of clean technologies. Third, this paper shows that mature clean technologies are easily adopted by firms. And to avoid price risk, banks would reduce order financing. Therefore, the policy implication is to encourage green finance for green transition with mature technology and a stable price.