Asset Diversification versus Climate Action
76 Pages Posted: 6 Feb 2020 Last revised: 19 Dec 2023
There are 3 versions of this paper
Asset Diversification versus Climate Action
Asset Diversification Versus Climate Action
Asset Diversification Versus Climate Action
Date Written: November 16, 2023
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, the equilibrium risk-free rate, and the precautionary savings motive. Climate disasters, which occur more frequently as temperature rises, significantly decrease the risk-free rate but increase risk premia on financial assets, especially if no climate policy is implemented. We extend the analysis for learning by doing in renewables production and show that the green transition occurs more quickly but the key insights still hold.
Keywords: decarbonization, diversification, carbon price, asset prices, green assets, disaster risk
JEL Classification: D81, G01, G12, Q5, Q54
Suggested Citation: Suggested Citation