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α: calibrated so average coauthorship-adjusted count equals average raw count
Promoting investment in low carbon “clean” sectors has gained popularity over the last years under the heading of sustainable finance, at the same time raising concerns about adverse welfare effects of such policies. We analyze the political economy of subsidizing investment in “clean” industries in a stylized two-sector small open economy model with irreversible investment and reelection risks. We show that sustainable finance has a welfare cost if more targeted climate policy instruments are available. However, sustainable finance may be used by incumbent governments as an instrument to influence environmental policy decisions of future governments, which may have different preferences. Our model also offers an explanation for the political polarization about sustainable finance and climate policy currently observed in the United States.