Can easing financial constraints reduce carbon emissions? Evidence from a large sample of French companies

This paper studies how monetary policy can shape firm-level carbon emissions and energy efficiency. It also looks at the heterogeneity of these effects by firm size, the underlying transmission channels and interaction with climate policies.

The authors draw on administrative and survey data on French manufacturing firms for the period 2000–2019, including emissions, energy use, financial conditions, environmental protection investments and productivity. They examine the effect of credit easing following a variation to interest rate policy made by the European Central Bank in July 2012.

They find that financially constrained firms cut emissions by about 9.4% more than unconstrained ones. This effect primarily stems from improvements in energy efficiency, reduced carbon intensity of energy, and general productivity improvements associated with capital deepening that outweighed modest scale effects.

The results are driven by small and medium-sized firms. Large firms including those regulated by the EU emissions trading system (ETS) showed no significant response. On average, emissions fell by 3.3% per year, summing up to 5.3 million tonnes of CO₂ saved (comparable to the savings from the EU ETS), highlighting the untargeted nature of the policy.

Key points for decision-makers

• The findings underscore the critical role of credit supply policies in advancing the low-carbon transition.
• Easing credit constraints reduces firm-level CO₂ emissions by roughly 9.41% more for financially exposed firms compared with less exposed firms.
• Only small and medium-sized firms benefit from relaxed credit constraints, achieving significantly larger improvements in both environmental and economic performance than the average firm.
• Easing financial constraints does not significantly affect firms regulated under the EU ETS relative to a matched control group. This aligns with the larger size and capital intensity of ETS firms, which renders them less sensitive to credit supply shocks.
• Based on the aggregation of the authors’ estimates, they suggest that about 5.3 million tonnes of CO₂ were saved in the manufacturing sector thanks to the relaxation of the credit constraints associated with the ECB’s July 2012 change in monetary policy. This corresponds to an average decline in emissions of 3.2% per year between 2012 and 2019.
• The results emphasise how monetary policy, while not specifically designed for climate goals, can have significant environmental consequences for the green transition of small and financially vulnerable firms.