A portfolio approach to climate investments: CAPM and endogenous risk

Maria Sandsmark and Haakon Vennemo

Environmental & Resource Economics, 2007, vol. 37, issue 4, 695 pages

Abstract: Is there a role for investments in climate change mitigation despite low expected return? We use a model of intertemporal expected utility maximisation to analyse this question. Similar to the capital asset pricing model (CAPM) the rate of return depends on the correlation of risk between the return on investments in climate change mitigation and the market portfolio, but in contrast to the classical CAPM we admit the fact that economic and environmental systems are jointly determined, implying that environmental risk is endogenous. Therefore, investments in climate change mitigation may reduce risk via self-protection and self-insurance. If risk reduction is accounted for in cost–benefit evaluations, climate investments may be justified despite low expected return. These aspects of climate investments are not, however, communicated via standard cost–benefit analyses of climate policy. Optimal climate policy may therefore be more ambitious than previously considered. Copyright Springer Science+Business Media, Inc. 2007

Keywords: CAPM; climate change; endogenous risk; climate investment; risk management; D81; G12; Q28 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10640-006-9049-4 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:enreec:v:37:y:2007:i:4:p:681-695

Ordering information: This journal article can be ordered from
http://www.springer. ... al/journal/10640/PS2

DOI: 10.1007/s10640-006-9049-4

Access Statistics for this article

Environmental & Resource Economics is currently edited by Ian J. Bateman

More articles in Environmental & Resource Economics from Springer, European Association of Environmental and Resource Economists Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().