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Finance and Climate Transition

Paper Session

Friday, Jan. 5, 2024 2:30 PM - 4:30 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon G
Hosted By: American Finance Association
  • Chair: Marcin Kacperczyk, Imperial College London

Incentives to Decarbonize and Innovate: The Role of Net Zero Commitments

Viral Acharya
,
New York University
Robert Engle
,
New York University
Olivier Wang
,
New York University

Abstract

We study a model of carbon emissions and green innovation which features both an environmental externality in the form of damages due to the stock of carbon and a technological externality in green innovation. When two Pigouvian instruments, carbon taxes and green innovation subsidies, are available, the social optimum can be efficiently decentralized without binding commitments by firms. However, when the level of carbon taxes and innovation subsidies are constrained, it can be optimal for large firms or coalitions of firms held by large institutional investors (common ownership) to make commitments to invest in green technologies, even if these firms and investors are purely profit-maximizing. Acting as Stackelberg leaders, their commitments spur more innovation by other firms, which ultimately reduces their own cost of decarbonization. Firm commitments also increase the credibility of government commitments to incentivize transition. We provide preliminary evidence that large firms and common ownership are associated with greater and earlier Net Zero commitments.

Does Climate Change Adaptation Matter? Evidence from the City on the Water

Matteo Benetton
,
University of California-Berkeley
Simone Emiliozzi
,
Bank of Italy
Elisa Guglielminetti
,
Bank of Italy
Michele Loberto
,
Bank of Italy
Alessandro Mistretta
,
Bank of Italy

Abstract

This paper exploits the operation of a sea wall built to protect the city of Venice from increasingly high tides to provide evidence on the capitalization of public infrastructure investment in climate change adaptation into housing values. Properties above the sea wall activation threshold experience a permanent reduction in flood risk and expected damages, which are reflected in higher prices. Using a difference-in-differences hedonic design we show that the sea wall led to a 4.5% increase in the value of the residential housing stock in Venice, which is a lower bound on the total welfare gains generated by the infrastructure.

Decarbonizing Institutional Investor Portfolios: Helping to Green the Planet or Just Greening Your Portfolio?

Vaska Atta-Darkua
,
University of Virginia
Simon Glossner
,
Federal Reserve Board
Philipp Krueger
,
University of Geneva
Pedro Matos
,
University of Virginia

Abstract

We study how institutional investors that join climate-related investor initiatives decarbonize their equity portfolios. Decarbonization can be achieved either by re-weighting portfolios towards lower carbon emitting firms or alternatively via targeted engagements with portfolio companies to reduce their emissions. Our findings indicate that portfolio re-weighting is the predominant greening strategy by climate-conscious investors, in particular by those based in countries with carbon emissions pricing schemes. We do not uncover much evidence of engagement even after the 2015 Paris Agreement. Furthermore, we find no evidence that climate-conscious investors allocate capital towards firms developing climate patents, but they do re-weight towards firms starting to generate green revenues. Overall, our analysis raises doubts about the effectiveness of investor-led initiatives in reducing corporate emissions and helping an all-economy transition to “green the planet”.

Financing the Adoption of Clean Technology

Andrea Lanteri
,
Duke University
Adriano Rampini
,
Duke University

Abstract

We analyze the adoption of clean technology by heterogeneous firms subject to financing constraints. We develop a model of investment with heterogeneous capital goods, which differ in their associated energy needs and in their age. We show that, in equilibrium, cleaner and newer capital requires a larger down payment. Therefore, financially constrained, smaller firms optimally invest in dirtier and older capital than unconstrained, larger firms. The model is consistent with the empirical patterns of technology adoption we document using data on commercial shipping fleets. Larger firms operate with higher energy efficiency, by investing in cleaner new technologies and operating newer capital, which tends to be more energy efficient. This equilibrium pattern of technology adoption implies that environmental policy has important distributional consequences.

Discussant(s)
Mariano Croce
,
Bocconi University, IGIER and BaffiCarefin
Jawad Addoum
,
Cornell University
Jules Van binsbergen
,
University of Pennsylvania
Ulrich Hege
,
Toulouse School of Economics
JEL Classifications
  • G0 - General