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Policy Transition Risk, Carbon Premiums, and Asset Prices

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  • Christoph Hambel
  • Frederick Van Der Ploeg

Abstract

We analyze the effects of policy transition risk on asset pricing and the green transition using a global two-sector, macro-finance model of climate and the economy. Policy transition risk results from probabilistic changes between three policy states: no, modest, and ambitious carbon pricing. We show that policy transition risk leads to carbon premiums (i.e. higher expected returns on brown than on green assets), especially if the economy is still quite carbon-intensive and close to the temperature cap, and thus accelerate the green transition. Increased transition risk leads to more precautionary saving and falls in the risk-free rate. We offer extensions to deal with physical risks (temperature-related risk of climate disasters and climate tipping), technology transition risk, and more realistic policy tipping with endogenous transition probabilities.

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  • Christoph Hambel & Frederick Van Der Ploeg, 2025. "Policy Transition Risk, Carbon Premiums, and Asset Prices," Economics Series Working Papers 1075, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:1075
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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