DP14863 Asset diversification versus climate action

Author(s): Christoph Hambel, Holger Kraft, Frederick van der Ploeg
Publication Date: June 2020
Keyword(s): asset prices, carbon price, Climate finance, decarbonization, disaster risk, Diversification, green assets
JEL(s): D81, G01, G12, Q5, Q54
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14863

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. We allow for endogenous growth and three types of damages from global warming. It is shown that, initially, 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, the equilibrium risk-free rate, and risk premia. Climate disasters, which are more likely to occur sooner as temperature rises, significantly affect asset prices.