Policy transition risk, carbon premiums, and asset prices

Christoph Hambel and Frederick (Rick) van der Ploeg

Journal of Monetary Economics, 2025, vol. 152, issue C

Abstract: We analyze the effects of policy transition risk on asset pricing and the green transition using a global two-sector, macro-finance model of climate and the economy. Policy transition risk results from probabilistic changes between three policy states: no, modest, and ambitious carbon pricing. We show that policy transition risk leads to carbon premiums (i.e. higher expected returns on brown than on green assets), especially if the economy is still quite carbon-intensive and close to the temperature cap, and thus accelerate the green transition. Increased transition risk leads to more precautionary saving and falls in the risk-free rate. We offer extensions to deal with physical risks (temperature-related risk of climate disasters and climate tipping), technology transition risk, and more realistic policy tipping with endogenous transition probabilities.

Keywords: Carbon premium; Green transition; Policy transition risks; Physical risks (search for similar items in EconPapers)
JEL-codes: D81 G01 G12 Q5 Q54 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Policy Transition Risk, Carbon Premiums, and Asset Prices (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:152:y:2025:i:c:s0304393225000510

DOI: 10.1016/j.jmoneco.2025.103780

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