WiP Seminar: Niko Samuli Jaakkola

Title of the presentation: "Endogenous climate policy, systemic risk and asset stranding"

  • Date: 03 November 2020 from 15:00 to 16:00

  • Event location: Microsoft Teams

Abstract

Asset stranding due to climate policies has been recognised as a serious potential threat to the stability of financial markets. In this paper, we model a regulator's decision to set a carbon tax under stochastic climate change. Severe climate change demands high carbon taxes and low rates of return. The resulting downward pressure on asset prices may precipitate a systemic crisis in the financial sector. We identify two self-confirming equilibria: One is associated with carbon-intense investments,  while the socially more desirable relates to a rapid fossil fuel phase-out. We propose instruments for the regulator to achieve the latter equilibrium: (1) increasing the equity buffer of the banking system; (2) increasing the wedge between the cost of funding fossil versus renewable assets; (3) separating fossil assets into a 'brown bank' network not connected to the rest of the financial sector. These functions mix together financial supervision and climate policy objectives.

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