Stranded Assets: How Policy Uncertainty affects Capital, Growth, and the Environment

Lucas Bretschger and Susanne Soretz

Environmental & Resource Economics, 2022, vol. 83, issue 2, No 1, 288 pages

Abstract: Abstract The paper considers stochastic environmental policy and its effects on the environment, portfolio composition, and economic growth. Capital accumulation causes pollution which is reduced by private green services and public abatement. The government subsidizes green services and taxes dirty capital albeit at a rate which may become random, causing unexpected capital write-offs. Tax jumps depend on natural degradation and environmental activism. We derive how uncertainty and political activism affect the risk premia for investors. We analyze the incentives for firms to increase the greenness of production in order to reduce political uncertainty. Stochastic taxation is shown to act as a substitute for green subsidies when uncertainty decreases in the ratio of green services to capital and agents use their green activities strategically. Tax uncertainty may trigger precautionary savings, causing additional growth and enhanced environmental deterioration.

Keywords: Policy uncertainty; Stranded assets; Private abatement; Stochastic growth (search for similar items in EconPapers)
JEL-codes: O10 Q52 Q54 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Working Paper: Stranded Assets: How Policy Uncertainty affects Capital, Growth, and the Environment (2018)
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DOI: 10.1007/s10640-021-00632-3

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