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‘Climate value at risk’ of global financial assets

Author

Listed:
  • Dietz, Simon
  • Bowen, Alex
  • Dixon, Charlie
  • Gradwell, Philip

Abstract

Investors and financial regulators are increasingly aware of climate-change risks. So far, most of the attention has fallen on whether controls on carbon emissions will strand the assets of fossil-fuel companies1, 2. However, it is no less important to ask, what might be the impact of climate change itself on asset values? Here we show how a leading integrated assessment model can be used to estimate the impact of twenty-first-century climate change on the present market value of global financial assets. We find that the expected ‘climate value at risk’ (climate VaR) of global financial assets today is 1.8% along a business-as-usual emissions path. Taking a representative estimate of global financial assets, this amounts to US$2.5 trillion. However, much of the risk is in the tail. For example, the 99th percentile climate VaR is 16.9%, or US$24.2 trillion. These estimates would constitute a substantial write-down in the fundamental value of financial assets. Cutting emissions to limit warming to no more than 2 °C reduces the climate VaR by an expected 0.6 percentage points, and the 99th percentile reduction is 7.7 percentage points. Including mitigation costs, the present value of global financial assets is an expected 0.2% higher when warming is limited to no more than 2 °C, compared with business as usual. The 99th percentile is 9.1% higher. Limiting warming to no more than 2 °C makes financial sense to risk-neutral investors—and even more so to the risk averse.

Suggested Citation

  • Dietz, Simon & Bowen, Alex & Dixon, Charlie & Gradwell, Philip, 2016. "‘Climate value at risk’ of global financial assets," LSE Research Online Documents on Economics 66226, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:66226
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    File URL: http://eprints.lse.ac.uk/66226/
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    References listed on IDEAS

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    1. Simon Dietz & Nicholas Stern, 2015. "Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions," Economic Journal, Royal Economic Society, vol. 0(583), pages 574-620, March.
    2. Dietz, Simon & Stern, Nicholas, 2015. "Endogenous growth, convexity of damage and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions," LSE Research Online Documents on Economics 58406, London School of Economics and Political Science, LSE Library.
    3. Elisabeth J. Moyer & Mark D. Woolley & Nathan J. Matteson & Michael J. Glotter & David A. Weisbach, 2014. "Climate Impacts on Economic Growth as Drivers of Uncertainty in the Social Cost of Carbon," The Journal of Legal Studies, University of Chicago Press, vol. 43(2), pages 401-425.
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    Citations

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    Cited by:

    1. Lamperti, F. & Dosi, G. & Napoletano, M. & Roventini, A. & Sapio, A., 2018. "Faraway, So Close: Coupled Climate and Economic Dynamics in an Agent-based Integrated Assessment Model," Ecological Economics, Elsevier, vol. 150(C), pages 315-339.
    2. D’Orazio, Paola & Popoyan, Lilit, 2019. "Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?," Ecological Economics, Elsevier, vol. 160(C), pages 25-37.
    3. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2018. "Climate Change, Financial Stability and Monetary Policy," Ecological Economics, Elsevier, vol. 152(C), pages 219-234.
    4. repec:pal:palcom:v:5:y:2019:i:1:d:10.1057_s41599-019-0315-9 is not listed on IDEAS
    5. Dunz, Nepomuk & Naqvi, Asjad & Monasterolo, Irene, 2019. "Climate Transition Risk, Climate Sentiments, and Financial Stability in a Stock-Flow Consistent approach," Ecological Economic Papers 6911, WU Vienna University of Economics and Business.
    6. Stefano Carattini & Suphi Sen, 2019. "Carbon Taxes and Stranded Assets: Evidence from Washington State," CESifo Working Paper Series 7785, CESifo Group Munich.
    7. repec:eee:enepol:v:132:y:2019:i:c:p:132-155 is not listed on IDEAS
    8. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-018-0055-7 is not listed on IDEAS
    9. repec:eee:ecolec:v:144:y:2018:i:c:p:228-243 is not listed on IDEAS
    10. repec:spr:climat:v:145:y:2017:i:3:d:10.1007_s10584-017-2095-9 is not listed on IDEAS
    11. repec:spr:ediscc:v:1:y:2017:i:1:d:10.1007_s41885-017-0004-3 is not listed on IDEAS
    12. repec:eee:ecolec:v:149:y:2018:i:c:p:239-253 is not listed on IDEAS
    13. Rick van der Ploeg, 2017. "Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets," CESifo Working Paper Series 6793, CESifo Group Munich.
    14. repec:eee:rensus:v:77:y:2017:i:c:p:525-535 is not listed on IDEAS
    15. repec:spr:masfgc:v:22:y:2017:i:8:d:10.1007_s11027-016-9718-8 is not listed on IDEAS
    16. repec:eee:appene:v:242:y:2019:i:c:p:1189-1197 is not listed on IDEAS

    More about this item

    Keywords

    environmental economics; governance;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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