Green Investors and the Return on Capital in General Equilibrium

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