Asset Diversification versus Climate Action

61 Pages Posted: 6 Feb 2020 Last revised: 30 Mar 2022

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: March 29, 2022

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 two types of damages from global warming. 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 risk premia. Climate disasters, which are more likely to occur sooner as temperature rises, significantly increase risk premia on financial assets.

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 (March 29, 2022). 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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