Green asset pricing
Jaccard, Ivan; Vermandel, Gauthier; Benmir, Ghassane (2021), Green asset pricing. https://basepub.dauphine.psl.eu/handle/123456789/22401
TypeDocument de travail / Working paper
External document linkhttps://doi.org/10.2866/48941
European Central Bank
Series titleEuropean Central Bank Working Papers Series
Series number2477 / October 2020
Frankfurt am Main
MetadataShow full item record
European Central Bank [ECB]
Laboratoire d'Economie de Dauphine [LEDa]
London School of Economics and Political Science [LSE]
Abstract (EN)Climate change is one of the greatest economic challenges of our time. Given the scale of the problem, the question of whether a carbon tax should be introduced is hotly-debated in policy circles. This paper studies the design of a carbon tax when environmental factors, such as air carbon-dioxide emissions (CO2), directly affect agents’ marginal utility of consumption. Our first result is that the optimal tax is determined by the shadow price of CO2 emissions. We then use asset-pricing theory to estimate this implicit price in the data and find that the optimal tax is pro-cyclical. It is therefore optimal to use the carbon tax to “cool down” the economy during booms and stimulate it in recessions. The optimal policy not only generates large welfare gains, it also reduces risk premiums and raises the average risk-free real rate. The effect of the tax on asset prices and welfare critically depends on the emission-abatement technology.
Subjects / KeywordsClimate Change; Compensation Effect; Bond Premium Puzzle; Natural Rate of Interest; Optimal Policy; Welfare
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