Pricing Climate Change Risks: CAPM with Rare Disasters and Stochastic Probabilities

Karydas, Christos; Xepapadeas, Anastasios

doi:10.2139/ssrn.3324499

Cited by 37 publications

(22 citation statements)

References 59 publications

(57 reference statements)

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“…More work is needed on how the Paris agreements affect the stock market value of carbon-based industries. For example, Karydas and Xepapadeas (2019) decompose the Barro (2009) disaster risks into those that are temperature related and those that are not and use a CAPM model to show the effects of such risks on asset pricing and asset holdings.…”

Section: Resultsmentioning

confidence: 99%

“…Once the tipping event occurred and uncertainty is resolved, agents know that policy will be sustained and this realisation is equivalent to the case of a policy surprise discussed above (cf. Bretschger and Soretz, 2019;Karydas and Xepapadeas, 2019). However, the period before the tip is qualitatively different from the case of an announced and fully anticipated policy.…”

Section: Fickle Climate Policies and Stranded Carbon Assetsmentioning

confidence: 89%

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Stranded Assets in the Transition to a Carbon-Free Economy

Ploeg

Rezai

2020

Annu. Rev. Resour. Econ.

126

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Assets in the fossil fuel industries are at risk of losing market value due to unanticipated breakthroughs in renewable technology and governments stepping up climate policies in light of the Paris commitments to limit global warming to 1.5 or 2°C. Stranded assets arise due to uncertainty about the future timing of these two types of events and substantial intertemporal and intersectoral investment adjustment costs. Stranding of assets mostly affects the 20 biggest oil, gas, and coal companies who have been responsible for at least one-third of global warming since 1965, but it also affects carbon-intensive industries such as steel, aluminum, cement, plastics, and greenhouse horticulture. A disorderly transition to the carbon-free economy will lead to stranded assets and legal claims. Institutional investors should be aware of these financial risks. A broader definition of stranded assets also includes countries reliant on fossil fuel exports and workers with technology-specific skills. Expected final online publication date for the Annual Review of Resource Economics, Volume 12 is October 5, 2020. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

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Section: Resultsmentioning

confidence: 99%

Section: Fickle Climate Policies and Stranded Carbon Assetsmentioning

confidence: 89%

Stranded Assets in the Transition to a Carbon-Free Economy

Ploeg

Rezai

2020

Annu. Rev. Resour. Econ.

126

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“…To support a safe and gradual transition to a low-carbon economy, the financial sector needs to evaluate and eventually address the new risks associated with climate change and decarbonization in an efficient manner. There is widespread concern that financial markets currently lack sufficient information about the carbon exposure of assets, resulting in risks from climate change and climate policy for investments (Karydas and Xepapadeas 2018). If not anticipated by the markets, climate shocks also cause asset stranding, i.e.…”

Section: Deep Decarbonization and Climate Neutralitymentioning

confidence: 99%

Twenty Key Challenges in Environmental and Resource Economics

Bretschger

Pittel

2020

Environ Resource Econ

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Economic and ecological systems are closely interlinked at a global and a regional level, offering a broad variety of important research topics in environmental and resource economics. The successful identification of key challenges for current and future research supports development of novel theories, empirical applications, and appropriate policy designs. It allows establishing a future-oriented research agenda whose ultimate goal is an efficient, equitable, and sustainable use of natural resources. Based on a normative foundation, the paper aims to identify fundamental topics, current trends, and major research gaps to motivate further development of academic work in the field.

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“…However if prices adjust very slowly, the cap-and-trade policy will have higher mean welfare. Karydas and Xepapadeas (2019) include transition risks of climate policy (i.e.…”

Section: Economic Risksmentioning

confidence: 99%

The Role of Uncertainty and Risk in Climate Change Economics

Chari¹

2018

Preprint

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Integrated Assessment Models (IAMs) of the climate and economy aim to analyze the impact and efficacy of policies that aim to control climate change, such as carbon taxes and subsidies. A major characteristic of IAMs is that their geophysical sector determines the mean surface temperature increase over the preindustrial level, which in turn determines the damage function. Most of the existing IAMs are perfect-foresight forward-looking models, assuming that we know all of the future information. However, there are significant uncertainties in the climate and economic system, including parameter uncertainty, model uncertainty, climate tipping risks, economic risks, and ambiguity. For example, climate sensitivity, a well-known parameter that measures how much the equilibrium temperature will change if the atmospheric carbon concentration doubles, can range from one to ten in the literature. Climate damages are also uncertain: some researchers assume that climate damages are proportional to instantaneous output, while others assume that climate damages have a more persistent impact on economic growth. The spatial distribution of climate damages is also uncertain.Climate tipping risks represent (nearly) irreversible climate events that may lead to significant changes in the climate system, such as the Greenland ice sheet collapse, while the conditions, probability of tipping, duration, and associated damage are also uncertain. Technological progress in carbon capture and storage, adaptation, renewable energy, and energy efficiency are uncertain too. Future international cooperation and implementation of international agreements in controlling climate change may vary over time, possibly due to economic risks, natural disasters, or social conflict. In the face of these uncertainties, policymakers have to provide a decision that considers important factors such as risk aversion, inequality aversion, and sustainability of the economy and ecosystem. Solving this problem may require richer and more realistic models than standard IAMs, and advanced computational methods. The recent literature has shown that these uncertainties can be incorporated into IAMs and may change optimal climate policies significantly.(2017) argue that policymakers need a numerical value for the social cost of carbon (SCC) for policy evaluation and implementation, and producing a credible numerical value requires sophisticated computer models, i.e. IAMs. Brock and Hansen (2018) stress: "Defenses for policies that combat climate damage externalities induced by human activity need not require precise knowledge of the magnitude or timing of the potential adverse impacts. ...Waiting for precise knowledge of the eventual consequences of continued or expanded human induced CO2 emissions could make mitigation or adaptation extremely costly." Goulder (2020) calls for urgent and stronger policy action to address global climate change. This review focuses on recent work about the role of uncertainty in controlling climate change. Here I use a broad perspective...

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Pricing Climate Change Risks: CAPM with Rare Disasters and Stochastic Probabilities

Cited by 37 publications

References 59 publications

Stranded Assets in the Transition to a Carbon-Free Economy

Stranded Assets in the Transition to a Carbon-Free Economy

Twenty Key Challenges in Environmental and Resource Economics

The Role of Uncertainty and Risk in Climate Change Economics

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