How does emission right-based lending contribute to sustainable production and green financing? A modelling study

Emission trading gives rise to a new financial tool, namely the emission right-based lending, under which a firm could pledge its emission right to borrow from the bank. Early practices show that this emerging financing mode can benefit both the emission right-holding companies and the banks. The firm gets more money for further investment or more green production, and the bank increases its interest income. To promote the application of emission right-based lending and enrich the research field of green finance, this research theoretically investigates its operational mechanisms, benefits and limitations through the construction of the firm’s decision model under this green financing mode. Our model goes deeper into the complicated interactions between variables and parameters and innovatively captures a key property of this financing mode. The numerical solution is not hard to obtain though it is infeasible to solve the model analytically. In addition, we conduct a group of numerical experiments on the theoretical model to explore how the emission right-based lending brings profit to the firm and the bank, and how it enhances sustainability. Results from the numerical analysis show that the new financial tool enjoys significant advantages in meeting the two goals. And several interesting effects of factors on the advantages are revealed, providing managerial insights regarding environment protection and sustainable development.