Stranding Ahoy? Heterogeneous Transition Beliefs and Capital Investment Choices

56 Pages Posted: 23 Dec 2022 Last revised: 7 Sep 2023

See all articles by Louison Cahen-Fourot

Louison Cahen-Fourot

Roskilde University

Emanuele Campiglio

University of Bologna; RFF-CMCC European Institute onEconomy and the Environment; London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

Louis Daumas

CIRED, International Research Center on Environment & Development, France

Michael Gregor Miess

Vienna University of Economics and Business

Andrew Yardley

Offshore Renewable Energy Catapult Ltd.

Date Written: December 1st, 2022

Abstract

Individuals have heterogeneous beliefs regarding the future speed and shape of the low-carbon transition. In this paper, we study to what extent opinion diversity matters for aggregate capital investment decisions. We develop a model where firms formulate heterogeneous expectations around a dominant narrative, or `market norm', with their dispersion increasing over a finite planning horizon. Our analytical and numerical results suggest that belief heterogeneity can significantly affect the share of low-carbon investments, with the strength of its effects non-linearly correlated to market norms. We show that investment behaviour tends to be more sensitive to shocks to short-term, rather than long-term, belief heterogeneity, highlighting the importance of setting credible short-term targets. Finally, we find beliefs to interact strongly and in non-trivial ways with measures of short-termism, with increasing agents' farsightedness not necessarily leading to less carbon-intensive investments under high heterogeneity.

Keywords: Asset stranding; Beliefs; Heterogeneous expectations; Investment choices; Low- carbon transition; Short-termism

JEL Classification: D84, E71, Q43, Q56

Suggested Citation

Cahen-Fourot, Louison and Campiglio, Emanuele and Daumas, Louis and Miess, Michael Gregor and Yardley, Andrew Allan, Stranding Ahoy? Heterogeneous Transition Beliefs and Capital Investment Choices (December 1st, 2022). Available at SSRN: https://ssrn.com/abstract=4289644 or http://dx.doi.org/10.2139/ssrn.4289644

Louison Cahen-Fourot

Roskilde University

Emanuele Campiglio

University of Bologna ( email )

Bologna
Italy

RFF-CMCC European Institute onEconomy and the Environment ( email )

Via Bergognone 34
Milan
Italy

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

Louis Daumas (Contact Author)

CIRED, International Research Center on Environment & Development, France ( email )

Campus du Jardin Tropical
45 bis avenue de la Belle Gabrielle
F94736 Nogent sur Marne Cedex
France

Michael Gregor Miess

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Andrew Allan Yardley

Offshore Renewable Energy Catapult Ltd.

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
228
Abstract Views
849
Rank
253,604
PlumX Metrics