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  Asset Pricing and the Carbon Beta of Externalities

Edenhofer, O., Lessmann, K., Tahri, I. (2021): Asset Pricing and the Carbon Beta of Externalities, (CESifo Working Paper ; 9269), Munich : CESifo GmbH, 44 p.

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 Creators:
Edenhofer, Ottmar1, Author              
Lessmann, Kai1, Author              
Tahri, Ibrahim1, Author              
Affiliations:
1Potsdam Institute for Climate Impact Research, ou_persistent13              

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Free keywords: carbon budget, CCAPM, policy instruments, external effect
 Abstract: Climate policy needs to set incentives for actors who face imperfect, distorted markets and large uncertainties about the costs and benefits of abatement. Investors price uncertain assets according to their expected return and risk (carbon beta). We study carbon pricing and financial incentives in a consumption-based asset pricing model distorted by technology spillover and time-inconsistency. We find that both distortions reduce the equilibrium asset return and delay investment in abatement. However, their effect on the carbon beta and risk premium of abatement can be decreasing (when innovation spillovers are not anticipated) or increasing (when climate policy is not credible). Efficiency can be restored by carbon pricing and financial incentives, implemented in our model by a regulator and by a long-term investment fund. The regulator commands carbon pricing and the fund provides subsidies to reduce technology costs or to boost investment returns. The investment subsidy creates a financial incentive that complements the carbon price. In this way the investment fund can support climate policy when the actions of the regulator fall short. These instruments must also consider the investment risk and the sequence of their implementation. The investment fund can then pave the way for carbon pricing in later periods by preventing a capital misallocation that would be too expensive to correct. Thus the investment fund improves the feasibility of ambitious carbon pricing.

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Language(s): eng - English
 Dates: 2021-08-15
 Publication Status: Finally published
 Pages: 44
 Publishing info: Munich : CESifo GmbH
 Table of Contents: -
 Rev. Type: -
 Identifiers: PIKDOMAIN: Director / Executive Staff / Science & Society
PIKDOMAIN: RD3 - Transformation Pathways
Organisational keyword: Director Edenhofer
Organisational keyword: RD3 - Transformation Pathways
MDB-ID: No data to archive
Research topic keyword: Economics
Research topic keyword: Climate Policy
Research topic keyword: Carbon Pricing
 Degree: -

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Title: CESifo Working Paper
Source Genre: Series
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Pages: 44 Volume / Issue: 9269 Sequence Number: - Start / End Page: - Identifier: -