Working Paper: CEPR ID: DP14863
Authors: Christoph Hambel; Holger Kraft; Frederick van der Ploeg
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. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, 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 affect asset prices.
Keywords: climate finance; decarbonization; diversification; carbon price; asset prices; green assets; disaster risk
JEL Codes: D81; G01; G12; Q5; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| desire to diversify assets (G11) | efforts to mitigate climate change (Q54) |
| efforts to mitigate climate change (Q54) | desire to diversify assets (G11) |
| desire to diversify assets (G11) | conflict with climate action (Q34) |
| climate disasters (Q54) | asset prices (G19) |
| rising temperatures (Q54) | climate disasters (Q54) |
| climate disasters (Q54) | equilibrium risk-free rate (D53) |
| climate disasters (Q54) | risk premia (G22) |
| level of diversification (L25) | optimal carbon price (D41) |