Carbon Taxes and Stranded Assets: Evidence from Washington State

Carattini, Stefano; Sen, Suphi

doi:10.2139/ssrn.3434841

Cited by 13 publications

(6 citation statements)

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“…See also reviews byMonasterolo (2020) andSemienuk et al (2020). There is also growing empirical literature studying climate policy and stranded assets, such asRamelli et al (2018),Carattini and Sen (2019),Barnett (2020),Sen and von Schickfus (2020). Van der Ploeg (2020) provides a review of the inability of financial markets to fully price climate risks.5 SeeBrunnermeier, Eisenbach and Sannikov (2013) for an extensive survey of the literature on macroeconomic models with financial frictions.…”

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confidence: 99%

Climate Policy, Financial Frictions, and Transition Risk

Carattini

Heutel

Melkadze

2021

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We study climate and macroprudential policies in an economy with financial frictions. Using a dynamic stochastic general equilibrium model featuring both a pollution market failure and a market failure in the financial sector, we explore transition risk -whether ambitious climate policy can lead to macroeconomic instability. It can, but the risk can be alleviated through macroprudential policies -taxes or subsidies on banks' assets. Then, we explore efficient climate and macroprudential policy in the long run and over business cycles. The presence of financial frictions affects the steady-state value and dynamic properties of the efficient carbon tax. Macroprudential policy alone, without a carbon tax, is not very effective at addressing the pollution externality.

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confidence: 99%

Climate Policy, Financial Frictions, and Transition Risk

Carattini

Heutel

Melkadze

2021

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“…10 When considering this asset write-off, note that we are referring to new policy or to a crystallization of policy expectations. We do not claim that asset values in this sector have not already been impaired by the market attaching some probability to a Carbon Bubble scenario (e.g., Atanasova and Schwartz, 2019;Carattini and Sen, 2019), but that the realization that the…”

Section: Stranded Fossil-fuel Assetsmentioning

confidence: 86%

The Carbon Bubble: climate policy in a fire‐sale model of deleveraging^∗

Comerford

Spiganti

2023

Scandinavian J Economics

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Credible implementation of climate change policy, consistent with the 2C limit, requires a large proportion of current fossil fuel reserves to remain unused. This issue, named the Carbon Bubble, is usually presented as a required asset write-off, with implications for investors. For the first time, we discuss its implications for macroeconomic policy. We embed the Carbon Bubble in a macroeconomic model exhibiting a financial accelerator: if investors are leveraged, the Carbon Bubble may precipitate a fire-sale of assets across the economy, and generate a large and persistent fall in output and investment. We find a role for policy in mitigating the Carbon Bubble.

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“…Therefore, we believe that it is important to complement the design of plausible transition risk scenarios with a more formal exploration of which policies and private responses-over time and across states of the world-are likely to be subgame-perfect equilibrium outcomes. Research that combines insights into the relevant political economy considerations with quantitative modeling techniques to explore whether a scenario with a given regulatory intervention is a plausible equilibrium policy outcome has the potential to add substantial value to regulatory practice (for the implications of climate policies and a broader review, see Annicchiarico et al 2021;Diluiso et al 2021;Dunz, Naqvi & Monasterolo 2021;Carattini et al 2022). 15…”

Section: Regulatory Transition Risk As a Policy Choicementioning

confidence: 99%

Climate Stress Testing

Acharya,

Berner,

Engle

et al. 2023

Annu. Rev. Financ. Econ.

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We explore the design of climate stress tests to assess and manage macroprudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to ( a) consider many transition risks as dynamic policy choices, ( b) better understand and incorporate feedback loops between climate change and the economy, and ( c) further explore compound risk scenarios in which climate risks co-occur with other risks. We discuss how the process of mapping climate stress scenarios into financial firm outcomes can incorporate existing evidence on the effects of various climate-related risks on credit and market outcomes. We argue that more research is required to ( a) identify channels through which plausible scenarios can lead to meaningful short-run impact on credit risks given typical bank loan maturities, ( b) incorporate bank-lending responses to climate risks, ( c) assess the adequacy of climate risk pricing in financial markets, and ( d) better understand how market participants form climate risk expectations and how that affects financial stability. Finally, we discuss the advantages and disadvantages of using market-based climate stress tests that can be conducted with publicly available data to complement existing stress-testing frameworks. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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Carbon Taxes and Stranded Assets: Evidence from Washington State

Cited by 13 publications

References 40 publications

Climate Policy, Financial Frictions, and Transition Risk

Climate Policy, Financial Frictions, and Transition Risk

The Carbon Bubble: climate policy in a fire‐sale model of deleveraging^∗

Climate Stress Testing

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Carbon Taxes and Stranded Assets: Evidence from Washington State

Cited by 13 publications

References 40 publications

Climate Policy, Financial Frictions, and Transition Risk

Climate Policy, Financial Frictions, and Transition Risk

The Carbon Bubble: climate policy in a fire‐sale model of deleveraging∗

Climate Stress Testing

Contact Info

Product

Resources

About

The Carbon Bubble: climate policy in a fire‐sale model of deleveraging^∗