Asset Pricing and Decarbonization: Diversification versus Climate Action

Frederick (Rick) van der Ploeg, Christoph Hambel and Holger Kraft

No 901, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon-intensive (dirty) sector. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, the desire to diversify assets in the portfolio complements the attempt to mitigate economic damages from climate change. In the long run, however, there is a trade-off between diversification and climate action. Therefore, in general, the carbon-intensive sector is not shut down completely. We derive the optimal carbon price, the equilibrium risk-free rate, and the risk premium of both assets. The risk-free rate is negatively affected by temperature, while the effect of temperature on the risk premiums depends on the type of damage specification. Climate disasters with an uncertain timing that rises with on temperature leads to a significant effect of climate change on asset prices.

Keywords: climate finance; decarbonization; diversification; carbon price; asset prices; green assets; disaster risk (search for similar items in EconPapers)
JEL-codes: D81 G01 G12 Q5 Q54 (search for similar items in EconPapers)
Date: 2020-02-11
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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