The Missing Government in Green Finance

The recent literature on green finance has extensively discussed the extent to which responsible investors can contribute to a greener economy, particularly regarding climate change. Somewhat surprisingly, governments as key players in climate policies are practically absent in this analysis. Using a simple model of private and public provision of a public good, we show that, even under favorable conditions, interaction with government policies renders private green investment ineffective and maybe even detrimental to making the economy truly greener. This result does not only hold for a benevolent, welfare-maximizing government but also in a political-economy setting with a medianvoter government.