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  5. The Path to Greener Financial Systems
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The Path to Greener Financial Systems

Paper Session

Friday, Jan. 7, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Robert Engle, New York University

Global Pricing of Carbon-Transition Risk

Patrick Bolton
,
Columbia University
Marcin Kacperczyk
,
Imperial College London

Abstract

Companies are exposed to carbon-transition risk as the global economy transitions away from fossil fuels to renewable energy. We estimate the market-based premium associated with this transition risk at the firm level in a cross-section of over 14,400 firms in 77 countries. We find a widespread carbon premium— higher stock returns for companies with higher levels of carbon emissions (and higher annual changes)—in all sectors over three continents, Asia, Europe, and North America. Short-term transition risk is greater for firms located in countries with lower economic development, greater reliance on fossil energy, and less inclusive political systems. Long-term transition risk is higher in countries with stricter domestic, but not international, climate policies. However, transition risk cannot be explained by greater exposure to physical (or headline) risk. Yet, raising investor awareness about climate change amplifies the level of transition risk.

Greening (Runnable) Brown Assets with a Liquidity Backstop

Eric Jondeau
,
University of Lausanne
Benoit Mojon
,
Bank for International Settlements
Cyril Monnet
,
University of Bern and Study Center Gerzensee

Abstract

The momentum toward greening the economy implies transition risks that are new threats to financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. We show that runs can be contained by a liquidity backstop with an access fee that depends on the firm’s carbon intensity, while the interest rate on the liquidity lent through this facility is independent from its carbon intensity.

Welfare Implications of Heat Waves

Harrison Hong
,
Columbia University
Neng Wang
,
Columbia University
Jiangmin Xu
,
Peking University
Jinqiang Yang
,
Shanghai University of Finance and Economics

Abstract

Heat waves (periods of extreme heat spanning several days) damage regional productivity and are becoming more frequent in the age of climate change. We model their implications for welfare using a continuous-time growth model. The discrete arrival of heat waves lead to downward jumps in regional productivity. Firms can install cooling capital (e.g. air conditioners, refrigeration) which mitigate the fat-tail damage to productivity conditioned on the arrival of a heatwave. We apply our model to US counties from 1960 to 2020. Our model can match regional economic moments, frequency of heatwave arrivals, and conditional loss distributions. We then use our model to generate regional estimates of capital formation, economic growth and household welfare based on projected heatwave trends across counties.

Discussant(s)
Lucrezia Reichlin
,
London Business School
Dana Kiku
,
University of Illinois-Urbana-Champaign
Monika Piazzesi
,
Stanford University
JEL Classifications
  • G1 - Asset Markets and Pricing
  • G2 - Financial Institutions and Services