Carbon taxes and the geography of fossil lending

Using data on syndicated loans, we find that the introduction of a carbon tax is associated with a decline (increase) in bank lending to coal, oil, and gas companies in domestic (foreign) markets. This manifestation of tax arbitrage is particularly pronounced for banks with large fossil-lending exposures, suggesting a role for bank specialization. Lending to private companies in foreign markets increases relatively more, implying bank incentives to avoid public scrutiny. We also find that banks reallocate a relatively larger share of their fossil loan portfolio to countries with less strict environmental regulation and bank supervision.