Green Investors and the Return on Capital in General Equilibrium

15 Pages Posted: 18 Feb 2024 Last revised: 8 Dec 2024

See all articles by Sijmen Duineveld

Sijmen Duineveld

Potsdam-Institut für Klimafolgenforschung (PIK)

Kai Lessmann

Potsdam-Institut für Klimafolgenforschung (PIK)

Christoph Hambel

Tilburg University - Department of Econometrics & Operations Research

Date Written: October 14, 2024

Abstract

We study how “green” preferences affect the return on capital in a general equilibrium model with overlapping generations and two types of investors. The “brown” type only cares about financial returns, while the “green” type also cares about climate damages from emissions. Based on the preferences of their owners, firms make an endogenous emission abatement choice. We find that the return on capital of green firms increases in the share of green investors, and that the return differential between green and brown firms decreases in the share of green investors. In general equilibrium, the labor demand of green firms can negatively impact the return on capital of brown firms. We show that a carbon tax curbs the return on capital differential as the behavior of the two types of investors converges.

Keywords: Carbon Abatement, Environmental Economics, ESG Investing, OLG Model

JEL Classification: D58, Q5, Q54

Suggested Citation

Duineveld, Sijmen and Lessmann, Kai and Hambel, Christoph,
Green Investors and the Return on Capital in General Equilibrium
(October 14, 2024). Available at SSRN: https://ssrn.com/abstract=4712457 or http://dx.doi.org/10.2139/ssrn.4712457

Sijmen Duineveld (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Kai Lessmann

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

HOME PAGE: http://https://pik-potsdam.de/members/lessmann

Christoph Hambel

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

Tilburg, 5000 LE
Netherlands

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