Asset Diversification versus Climate Action

64 Pages Posted: 6 Feb 2020 Last revised: 3 Aug 2022

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: July 30, 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

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 30, 2022). 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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