Asset diversification versus climate action

Working paper

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. We allow for two types of damages from global warming. 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, the equilibrium risk-free rate, and risk premia. Climate disasters, which are more likely to occur sooner as temperature rises, significantly increase risk premia on financial assets.

Authors: Hambel, C; Kraft, H; van der Ploeg, R

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford
• Publication date: 2020-02-11
• ISSN: 1471-0498
• Paper number: 901
• Language: English
• Keywords: green assets; carbon price; asset prices; disaster risk; decarbonization; diversification