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Asset Diversification Versus Climate Action

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  • Christoph Hambel
  • Holger Kraft
  • Frederick van der Ploeg

Abstract

Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon‐intensive sector. Given that the economy is initially heavily dependent on carbon‐intensive capital, the desire to diversify assets complements the attempt to mitigate economic damages from climate change. In the longer run, however, a trade‐off between diversification and climate action emerges. We derive the optimal carbon price and the equilibrium risk‐free rate, and risk premia. Climate disasters significantly decrease the risk‐free rate but increase risk premia on financial assets, especially if no climate policy is implemented.

Suggested Citation

  • Christoph Hambel & Holger Kraft & Frederick van der Ploeg, 2024. "Asset Diversification Versus Climate Action," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1323-1355, August.
  • Handle: RePEc:wly:iecrev:v:65:y:2024:i:3:p:1323-1355
    DOI: 10.1111/iere.12691
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    Cited by:

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    2. Olijslagers, Stan & van der Ploeg, Frederick & van Wijnbergen, Sweder, 2023. "On current and future carbon prices in a risky world," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    3. Michael D. Bauer & Glenn D. Rudebusch, 2023. "The Rising Cost of Climate Change: Evidence from the Bond Market," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1255-1270, September.
    4. Louis Daumas, 2021. "Should we fear transition risks - A review of the applied literature," Working Papers 2021.05, FAERE - French Association of Environmental and Resource Economists.
    5. Diluiso, Francesca & Annicchiarico, Barbara & Kalkuhl, Matthias & Minx, Jan C., 2021. "Climate actions and macro-financial stability: The role of central banks," Journal of Environmental Economics and Management, Elsevier, vol. 110(C).
    6. Abiry, Raphael & Ferdinandusse, Marien & Ludwig, Alexander & Nerlich, Carolin, 2022. "Climate change mitigation: How effective is green quantitative easing?," ZEW Discussion Papers 22-027, ZEW - Leibniz Centre for European Economic Research.
    7. Jin, Wei & Shi, Xunpeng & Zhang, Lin, 2021. "Energy transition without dirty capital stranding," Energy Economics, Elsevier, vol. 102(C).
    8. Jin, Wei, 2021. "Path dependence, self-fulfilling expectations, and carbon lock-in," Resource and Energy Economics, Elsevier, vol. 66(C).
    9. Wei Jin & Rick van der Ploeg & Lin Zhang, 2020. "Do We Still Need Carbon-Intensive Capital When Transitioning to a Green Economy?," CESifo Working Paper Series 8745, CESifo.
    10. Francesca Diluiso & Barbara Annicchiarico & Matthias Kalkuhl & Jan C. Minx, 2020. "Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy," CEIS Research Paper 501, Tor Vergata University, CEIS, revised 22 Jul 2020.
    11. Gollier, Christian, 2018. "The cost-efficiency carbon pricing puzzle," TSE Working Papers 18-952, Toulouse School of Economics (TSE), revised May 2024.
    12. Karydas, Christos & Xepapadeas, Anastasios, 2022. "Climate change financial risks: Implications for asset pricing and interest rates," Journal of Financial Stability, Elsevier, vol. 63(C).

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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