Abstract
We analyze asset pricing and climate policy in the face of transition and physical risks using a global two-sector, DSGE model of climate and the economy. Physical risks consist of temperature-related risks of recurring climate-related disasters and the risks of irreversible climate tipping. Transition risks consist of changes in policy regime with three states (no, modest, or aggressive carbon pricing) and of technological breakthroughs in negative emissions technologies. Both these type of risks affect the carbon price, the risk-free rate, and the risk premiums of green and brown assets. We find that carbon premiums result from policy transition risks, especially if the economy is still quite carbon-intensive and close to the temperature cap, and give a signal to accelerate the green transition. We also show that transition risks trigger asset stranding. The risks of asset stranding are also priced in and lead to more sizable carbon risk premiums and a more rapid green transition.
Local Organizer: Niko Jaakkola