Asset diversification versus climate action
INTERNATIONAL ECONOMIC REVIEW(2024)
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.
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Key words
diversification,decarbonization,climate action
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