Asset Diversification versus Climate Action

55 Pages Posted: 6 Feb 2020 Last revised: 31 Jul 2020

See all articles by Christoph Hambel

Christoph Hambel

Goethe University Frankfurt

Holger Kraft

Goethe University Frankfurt

Rick van der Ploeg

University of Oxford - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: July 31, 2020

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 increase risk premia.

Keywords: decarbonization, diversification, carbon price, asset prices, green assets, disaster risk

JEL Classification: D81, G01, G12, Q5, Q54

Suggested Citation

Hambel, Christoph and Kraft, Holger and der Ploeg, Rick van, Asset Diversification versus Climate Action (July 31, 2020). Available at SSRN: https://ssrn.com/abstract=3528239 or http://dx.doi.org/10.2139/ssrn.3528239

Christoph Hambel

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Rick van Der Ploeg

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

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