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Why market actors fuel the carbon bubble. The agency, governance, and incentive problems that distort corporate climate risk management

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  • Drew Riedl

Abstract

Similar to the housing bubble, a carbon bubble is being fueled by misaligned corporate governance structures and market incentives that distort capital allocation. Science indicates that a rapid energy transition is needed. However, oil and gas reserves already vastly exceed what can be consumed and continue to increase. A significant portion of fossil fuel assets will eventually become ‘stranded’ – prematurely obsolete over their expected lives. This article examines the various market actors and motivations that are distorting corporate and financial climate risk management. Incentives and structural impediments among key market participants such as short-termism/myopia, long-term arbitrage costs, agency costs / career self-interest, and analytical and cognitive limitations (e.g. bounded rationality), exacerbate the problem. Recognition of these motivations is a ‘heads up’ for shareholders, investors and others to better manage risk.

Suggested Citation

  • Drew Riedl, 2022. "Why market actors fuel the carbon bubble. The agency, governance, and incentive problems that distort corporate climate risk management," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 12(2), pages 407-422, April.
    • Handle: RePEc:taf:jsustf:v:12:y:2022:i:2:p:407-422
    DOI: 10.1080/20430795.2020.1769986
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    Cited by:

    1. Sakariyahu, Rilwan & Lawal, Rodiat & Kwansa, Nana Abena & Ahmed, Ammar & Adamolekun, Gbenga, 2023. "Emissions trading scheme participation and firms’ cash holdings," Finance Research Letters, Elsevier, vol. 58(PC).
    2. Wei, Yigang & Li, Yan & Wang, Zhicheng, 2022. "Multiple price bubbles in global major emission trading schemes: Evidence from European Union, New Zealand, South Korea and China," Energy Economics, Elsevier, vol. 113(C).

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