Asset Diversification Versus Climate Action

64 Pages Posted: 16 Jun 2020

See all articles by Christoph Hambel

Christoph Hambel

Goethe University Frankfurt

Holger Kraft

Goethe University Frankfurt

Rick van der Ploeg

University of Oxford

Multiple version iconThere are 3 versions of this paper

Date Written: June 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 affect asset prices.

Keywords: asset prices, carbon price, Climate finance, decarbonization, disaster risk, Diversification, green assets

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

Suggested Citation

Hambel, Christoph and Kraft, Holger and van der Ploeg, Frederick, Asset Diversification Versus Climate Action (June 2020). CEPR Discussion Paper No. DP14863, Available at SSRN: https://ssrn.com/abstract=3628183

Christoph Hambel (Contact Author)

Goethe University Frankfurt ( email )

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

Holger Kraft

Goethe University Frankfurt ( email )

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

Frederick Van der Ploeg

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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