Stranded Assets: How Policy Uncertainty Affects Capital, Growth, and the Environment

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Standard environmental economics prescribes policies which are optimal and implemented immediately. The paper argues that, in reality, environmental policy often deviates from the optimum and implementation is not deterministic but subject to major uncertainty and frequent change. We present a model with a stochastic policy process that affects investors' decisions and the composition of capital. We assume that pollution is reduced by private green services and public abatement. The government subsidizes green services and taxes dirty capital albeit at a rate which may become random, causing unexpected capital write-offs. Tax jumps depend on environmental degradation and the share of green services. We show how policy uncertainty affects capital valuation and how it alters individual portfolios, green services, and economic growth. Terms of use: Documents in EconStor mayJEL Classification: Q52, Q54, O10

The risk of policy tipping and stranded carbon assets

“…Once markets realize that climate policy will be enacted, capital and fossil reserves suffer a sudden loss in value while botching or cancelling an announced tightening of climate policy immediately boosts the scarcity rent and market capitalization of fossil fuel companies, leading to an investment boom in exploration and a surge in discoveries (cf. Bretschger and Soretz, 2019; Karydas and Xepapadeas, 2019).…”

“…Once climate policy is anticipated, less irreversible investments in, say, coal-fired power stations are undertaken, since policy lowers the profitability and valuation of capital (cf. Mukanjari and Sterner, 2018;Baldwin et al, 2019;Bretschger and Soretz, 2019;Kalkuhl et al 2019;Rozenberg et al, 2019).…”

Pricing Climate Change Risks: CAPM with Rare Disasters and Stochastic Probabilities

“…In the interest of tractability we abstract from both options, since they would not alter the main insights in any fundamental way. 21 As in Bretschger and Soretz (2018), we could also assume that the effect of the policy X depends on the capital ratio KB/KG, such that environmental policy is more stringent in countries with an already low share of brown capital e.g. Norway.…”

Climate Transition Risk and Development Finance: A Carbon Risk Assessment of China's Overseas Energy Portfolios

“…The transmission of shocks on the market share of sectors is assumed to be linear and the distribution of balance sheet shocks on projects is assumed to be uniform. We are already relaxing these assumptions, considering the introduction of a Poisson probability distribution of climate policy shocks (according to Bretschger and Soretz, 2018) with the aim of refining the project- Our results have policy implications for the Chinese policy banks' portfolio risk management strategies under climate transition risk. Chinese policy banks' overseas energy portfolios are highly exposed to fossil fuel investments that could become stranded once technological improvements in renewable energy and late and sudden climate policies are introduced.…”