IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_7945.html
   My bibliography  Save this paper

Climate Policy, Stranded Assets, and Investors' Expectations

Author

Listed:
  • Suphi Sen
  • Marie-Theres von Schickfus

Abstract

Climate policies to keep global warming below 2℃ might render some of the world’s fossil fuels and related infrastructure worthless prior to the end of their economic life time. Therefore, some energy-sector assets are at risk of becoming stranded. This paper investigates whether and how investors price in this risk of asset stranding. We exploit the gradual development of a German climate policy proposal aimed at reducing electricity production from coal and analyze its effect on the valuation of energy utilities. We find that investors take stranded asset risk into consideration, but that they also expect a financial compensation for their stranded assets.

Suggested Citation

  • Suphi Sen & Marie-Theres von Schickfus, 2019. "Climate Policy, Stranded Assets, and Investors' Expectations," CESifo Working Paper Series 7945, CESifo.
    • Handle: RePEc:ces:ceswps:_7945
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp7945.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jenkins, Jesse D., 2014. "Political economy constraints on carbon pricing policies: What are the implications for economic efficiency, environmental efficacy, and climate policy design?," Energy Policy, Elsevier, vol. 69(C), pages 467-477.
    2. Unruh, Gregory C., 2002. "Escaping carbon lock-in," Energy Policy, Elsevier, vol. 30(4), pages 317-325, March.
    3. Cludius, Johanna & Hermann, Hauke & Matthes, Felix Chr. & Graichen, Verena, 2014. "The merit order effect of wind and photovoltaic electricity generation in Germany 2008–2016: Estimation and distributional implications," Energy Economics, Elsevier, vol. 44(C), pages 302-313.
    4. Massimo Guidolin & Eliana La Ferrara, 2007. "Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?," American Economic Review, American Economic Association, vol. 97(5), pages 1978-1993, December.
    5. Derek Lemoine, 2017. "Green Expectations: Current Effects of Anticipated Carbon Pricing," The Review of Economics and Statistics, MIT Press, vol. 99(3), pages 499-513, July.
    6. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    7. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 651-667.
    8. Taran Fæhn, Cathrine Hagem, Lars Lindholt, Ståle Mæland, and Knut Einar Rosendahl, 2017. "Climate policies in a fossil fuel producing country demand versus supply side policies," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    9. Paul Collier & Anthony J. Venables, 2014. "Closing coal: economic and moral incentives," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 30(3), pages 492-512.
    10. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, June.
    11. Koch, Nicolas & Grosjean, Godefroy & Fuss, Sabine & Edenhofer, Ottmar, 2016. "Politics matters: Regulatory events as catalysts for price formation under cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 78(C), pages 121-139.
    12. Hans-Werner Sinn, 2008. "Public policies against global warming: a supply side approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(4), pages 360-394, August.
    13. Unruh, Gregory C., 2000. "Understanding carbon lock-in," Energy Policy, Elsevier, vol. 28(12), pages 817-830, October.
    14. Ramiah, Vikash & Martin, Belinda & Moosa, Imad, 2013. "How does the stock market react to the announcement of green policies?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1747-1758.
    15. Peterson, Sonja, 2015. "Clash between national and EU climate policies: The German climate levy as a remedy?," Kiel Policy Brief 92, Kiel Institute for the World Economy (IfW Kiel).
    16. Philipp M. Richter & Roman Mendelevitch & Frank Jotzo, 2015. "Market Power Rents and Climate Change Mitigation: A Rationale for Coal Taxes?," Discussion Papers of DIW Berlin 1471, DIW Berlin, German Institute for Economic Research.
    17. Mier, Mathias & Weissbart, Christoph, 2020. "Power markets in transition: Decarbonization, energy efficiency, and short-term demand response," Energy Economics, Elsevier, vol. 86(C).
    18. Paul Collier & Anthony J. Venables, 2014. "Closing coal: economic and moral incentives," Oxford Review of Economic Policy, Oxford University Press, vol. 30(3), pages 492-512.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Suphi Sen & Marie-Theres von Schickfus, 2017. "Will Assets be Stranded or Bailed Out? Expectations of Investors in the Face of Climate Policy," ifo Working Paper Series 238, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Kim Collins & Roman Mendelevitch, 2015. "Leaving Coal Unburned: Options for Demand-Side and Supply-Side Policies," DIW Roundup: Politik im Fokus 87, DIW Berlin, German Institute for Economic Research.
    3. Michael Lazarus & Harro van Asselt, 2018. "Fossil fuel supply and climate policy: exploring the road less taken," Climatic Change, Springer, vol. 150(1), pages 1-13, September.
    4. Gregor Semieniuk & Emanuele Campiglio & Jean‐Francois Mercure & Ulrich Volz & Neil R. Edwards, 2021. "Low‐carbon transition risks for finance," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 12(1), January.
    5. Louis Daumas, 2021. "Should we fear transition risks - A review of the applied literature," Working Papers 2021.05, FAERE - French Association of Environmental and Resource Economists.
    6. Frederick van der Ploeg & Armon Rezai, 2020. "Stranded Assets in the Transition to a Carbon-Free Economy," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 281-298, October.
    7. Philippe Le Billon & Berit Kristoffersen, 2020. "Just cuts for fossil fuels? Supply-side carbon constraints and energy transition," Environment and Planning A, , vol. 52(6), pages 1072-1092, September.
    8. Philipp M. Richter & Roman Mendelevitch & Frank Jotzo, 2018. "Coal taxes as supply-side climate policy: a rationale for major exporters?," Climatic Change, Springer, vol. 150(1), pages 43-56, September.
    9. Stefano Carattini & Suphi Sen, 2019. "Carbon Taxes and Stranded Assets: Evidence from Washington State," CESifo Working Paper Series 7785, CESifo.
    10. van der Ploeg, Frederick & Rezai, Armon, 2020. "The risk of policy tipping and stranded carbon assets," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    11. Birindelli, Giuliana & Miazza, Aline & Paimanova, Viktoriia & Palea, Vera, 2023. "Just “blah blah blah”? Stock market expectations and reactions to COP26," International Review of Financial Analysis, Elsevier, vol. 88(C).
    12. Wanling Rudkin & Charlie X Cai, 2019. "Reaction Asymmetries to Social Responsibility Index Recomposition: A Matching Portfolio Approach," Papers 1911.12582, arXiv.org.
    13. van den Bijgaart, Inge & Rodriguez, Mauricio, 2023. "Closing wells: Fossil development and abandonment in the energy transition," Resource and Energy Economics, Elsevier, vol. 74(C).
    14. Wei Jin & ZhongXiang Zhang, 2018. "Capital Accumulation, Green Paradox, and Stranded Assets: An Endogenous Growth Perspective," Working Papers 2018.33, Fondazione Eni Enrico Mattei.
    15. Peszko,Grzegorz & Van Der Mensbrugghe,Dominique & Golub,Alexander Alexandrovich, 2020. "Diversification and Cooperation Strategies in a Decarbonizing World," Policy Research Working Paper Series 9315, The World Bank.
    16. Christian Rauh & Gerald Schneider, 2013. "There is No such Thing as a Free Open Sky: Financial Markets and the Struggle over European Competences in International Air Transport," Journal of Common Market Studies, Wiley Blackwell, vol. 51(6), pages 1124-1140, November.
    17. Konrad, Kai A. & Lommerud, Kjell Erik, 2021. "Effective climate policy needs non-combustion uses for hydrocarbons," Energy Policy, Elsevier, vol. 157(C).
    18. Antoine GODIN & Emanuele CAMPIGLIO & Eric KEMP-BENEDICT, 2017. "Networks of stranded assets: A case for a balance sheet approach," Working Paper d51a41b5-00ba-40b4-abe6-5, Agence française de développement.
    19. Bergholt, Drago & Røisland, Øistein & Sveen, Tommy & Torvik, Ragnar, 2023. "Monetary policy when export revenues drop," Journal of International Money and Finance, Elsevier, vol. 137(C).
    20. Baldwin, Elizabeth & Cai, Yongyang & Kuralbayeva, Karlygash, 2020. "To build or not to build? Capital stocks and climate policy∗," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).

    More about this item

    Keywords

    stranded assets; climate policy; expectations; utilities; event study;
    All these keywords.

    JEL classification:

    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_7945. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.