Asset Diversification versus Climate Action

76 Pages Posted: 6 Feb 2020 Last revised: 19 Dec 2023

See all articles by Christoph Hambel

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research

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: 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

Hambel, Christoph and Kraft, Holger and der Ploeg, Rick van, Asset Diversification versus Climate Action (November 16, 2023). Available at SSRN: https://ssrn.com/abstract=3528239 or http://dx.doi.org/10.2139/ssrn.3528239

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

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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