Carbon Taxes and Stranded Assets: Evidence from Washington State

57 Pages Posted: 9 Aug 2019

See all articles by Stefano Carattini

Stefano Carattini

Georgia State University

Suphi Sen

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: 2019

Abstract

The climate challenge requires ambitious climate policy. A sudden increase in carbon prices can lead to major shocks to the stock market. Some assets will lose part of their value, others all of it, and hence become "stranded". If the markets are not ready to absorb the shock, a financial crisis could follow. How well investors anticipate, and thus how large these shocks may be, is an empirical question. We analyze stock market reactions to the rejection of two carbon tax initiatives by voters in Washington state. We build proper counterfactuals for Washington state firms and find that these modest policy proposals with limited jurisdiction caused substantial readjustments on the stock market, especially for carbon-intensive stocks. Our results reinforce concerns about "stranded assets" and the risk of financial contagion. Our policy implications support the inclusion of transition risks in macroprudential policymaking and carbon disclosure and climate stress tests as the main policy responses.

Keywords: carbon pricing, financial returns, systemic risk, macroprudential policies, voting

JEL Classification: G120, H230, H710, L500, Q580

Suggested Citation

Carattini, Stefano and Sen, Suphi, Carbon Taxes and Stranded Assets: Evidence from Washington State (2019). CESifo Working Paper No. 7785, Available at SSRN: https://ssrn.com/abstract=3434841

Stefano Carattini (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Suphi Sen

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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