“Climate Risks: Carbon Pricing and Financial Policy”

Rick van der Ploeg presented some results from his paper “Macro-Financial Implications of Climate Change and the Carbon Transition.” From the abstract:

A review is given of what needs to be done to ensure a smooth transition to the carbon-free economy. If policy internalises global warming damages, the carbon price rises at the same rate as economic activity and the level depends on economic and climatic uncertainties. If policy makers keep temperature below a ceiling, the carbon price must grow at a rate equal to the risk-adjusted interest rate. Both approaches benefit from asset pricing insights. It is shown how climate policy is frustrated by the motive to diversify assets across carbon-intensive and green assets. Business-as-usual and optimal outcomes are contrasted with outcomes where there is a risk of policy tipping. The latter leads to sudden changes in market valuation and risk of stranded assets. Empirical evidence for effects of anticipated green transitions on asset returns is reviewed. Finally, macro-financial policies for the green transition and policies to avoid disorderly green transitions are discussed.