Welfare Consequences of Sustainable Finance

Harrison Hong, Neng Wang, Jinqiang Yang and Stefano Giglio

The Review of Financial Studies, 2023, vol. 36, issue 12, 4864-4918

Abstract: We model the welfare consequences of mandates that restrict investors to hold firms with net-zero carbon emissions. To qualify for these mandates, value-maximizing firms have to accumulate decarbonization capital. Qualification lowers a firm’s required return by its decarbonization investments divided by Tobin’s q, that is, the greenium or the dividend yield shareholders forgo to address the global-warming externality. The welfare-maximizing mandate approximates the first-best solution, yielding welfare gains compared to laissez-faire by mitigating the weather disaster risks resulting from carbon emissions. Our model generates optimal transition paths for decarbonization that we use to evaluate proposed net-zero targets.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

JEL-codes: E20 G12 G30 H50 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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