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Rick Van der Ploeg, Oxford University
Asset Diversification versus Climate Action
Asset pricing and climate policy are analysed in a global economy where consumption goods are produced by both a green and a carbon-intensive sector. We allow for endogenous growth and two types of damages from global warming. It is shown that, initially, 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, the equilibrium risk-free rate, and risk premia. Climate disasters, which are more likely to occur sooner as temperature rises, significantly increase risk premia.

Joint with Christoph Hambel and Holger Kraft.

Dec 7, 2021 02:00 PM in Brussels

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