As interest rates rise, financing investments in green technologies will become more expensive, generating the risk that higher costs of capital may slow down the pace of decarbonisation. There are, however, three interrelated reasons why tighter financing conditions are the appropriate response to the challenges we are facing today. First, current high inflation is a tax on investment.
In many countries, it raises the user cost of capital by raising the effective tax rate on business investment. [9] High inflation also increases uncertainty and distorts relative price signals relevant for investment decisions. And it may slow down productivity growth, as occurred in the United States in the 1970s. [10] Therefore, the green transition would not thrive in a high inflation environment.