Abstract
<jats:p>We study the impact of carbon pricing on household finance using European microdata on loans for internal combustion engine vehicles. Exploiting variation across fuel efficiency within Germany and across identical car models in other European countries in a difference-in-differences framework, we find that banks respond to Germany’s carbon price announcement by raising interest rates by 0.3-0.5 percentage points, with larger increases for loans on fuel-intensive vehicles and for longer maturities. Banks also shorten loan maturity, reduce amounts, and shift to linear repayments, while households choose more fuel-efficient new cars. Captive banks respond more strongly than commercial banks. Collateral and default risk channels jointly explain these adjustments, highlighting household finance as a key transmission channel of climate policies.</jats:p>