How does bank loans affect carbon emissions? A comparison of household and business loans

Abstract Household and business loans are essential financial instruments that bolster economic growth by improving access to capital and fostering various economic activities. However, their environmental implications remain underexplored, particularly in economies with high carbon footprints like the United States. Household loans primarily facilitate consumer spending and personal investments, helping households meet financial needs and supporting overall demand in the economy. In contrast, business loans drive economic expansion by providing firms with the necessary resources to grow, innovate, and enhance productivity. However, in the United States, where environmental pollution is a significant concern, these loans can also amplify environmental challenges. Business loans, in particular, are often channeled into industries with substantial carbon footprints, potentially accelerating emissions through increased production, transportation, and energy consumption. This study employs the machine learning-based Kernel-based Regularized Least Squares technique, which allows for flexible, non-parametric estimation, capturing complex relationships between variables without imposing restrictive functional forms. The analysis covers the period from 1945 to 2020. The findings show that home loans have no discernible impact on emissions, while corporate loans and GDP growth do. While home lending may not be as closely associated with carbon-intensive spending, this study implies that company loans serve as a conduit for emission-intensive activities. Considering these findings, it is recommended that policies promote sustainable business loan practices, such as incentivizing investments in low-carbon technologies, to reduce the environmental footprint associated with business-driven growth. Additionally, financial regulations could encourage green credit mechanisms, ensuring that business lending aligns with long-term sustainability goals.