ASSET DIVERSIFICATION VERSUS CLIMATE ACTION

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

International Economic Review, 2024, vol. 65, issue 3, 1323-1355

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 sector. Given that the economy is initially heavily dependent on carbon‐intensive capital, the desire to diversify assets complements the attempt to mitigate economic damages from climate change. In the longer run, however, a trade‐off between diversification and climate action emerges. We derive the optimal carbon price and the equilibrium risk‐free rate, and risk premia. Climate disasters significantly decrease the risk‐free rate but increase risk premia on financial assets, especially if no climate policy is implemented.

Date: 2024
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https://doi.org/10.1111/iere.12691

Related works:
Working Paper: Asset Diversification versus Climate Action (2020)
Working Paper: Asset diversification versus climate action (2020)
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