Carbon Returns and Risk Premia in a Macro-Finance Model for the Climate Transition

71 Pages Posted: 31 Jan 2025

See all articles by Michael Donadelli

Michael Donadelli

University of Brescia

Patrick Grüning

Latvijas Banka

Steffen Hitzemann

University of Houston - Department of Finance

Date Written: June 06, 2022

Abstract

This paper proposes a macro-finance model to characterize asset prices, risk premia, and macroeconomic quantities over the climate transition. The calibrated model shows that it is excessively difficult to quantify carbon premia based on stock returns realized since the start of the transition. In contrast, one can very well pin down since when and by how much firm valuations were affected through the combined cash flow and risk premium effects. Applying the model insights to the oil sector, we find that relative oil firm valuations have declined by more than 40% since the year 2000 with the proceeding climate transition.

Keywords: climate change, carbon premia, policy risk, macro-finance, oil firms

JEL Classification: E2, E3, G12, Q43

Suggested Citation

Donadelli, Michael and Grüning, Patrick and Hitzemann, Steffen, Carbon Returns and Risk Premia in a Macro-Finance Model for the Climate Transition (June 06, 2022). Available at SSRN: https://ssrn.com/abstract=5118182 or http://dx.doi.org/10.2139/ssrn.5118182

Michael Donadelli

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

Patrick Grüning

Latvijas Banka ( email )

K. Valdemāra iela 2A
Riga, 1050
Latvia

Steffen Hitzemann (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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