A Run on Fossil Fuel? Climate Change and Transition Risk
76 Pages Posted: 6 Feb 2023 Last revised: 28 Sep 2023
Date Written: September 18, 2023
Abstract
I study the dynamic implications of climate transition risk on macroeconomic outcomes
and asset prices. Using a general equilibrium model, I show that the anticipation
of a climate transition shock, which will restrict future fossil fuel use and is amplified by
intensifying climate change, can produce a “run” effect where fossil fuel use accelerates
and fossil-fuel-related firm and spot prices are driven down. I use a novel empirical
measure of climate-transition-related events to show that shifts in transition risk likelihood
lead to dynamic and persistent empirical outcomes that are consistent with model
predictions associated with a “run on fossil fuel.”
Keywords: Climate Change, Transition Risk, Production-Based Asset Pricing
JEL Classification: G12, Q54, Q58
Suggested Citation: Suggested Citation