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Green asset pricing

Jaccard, Ivan; Vermandel, Gauthier; Benmir, Ghassane (2021), Green asset pricing. https://basepub.dauphine.psl.eu/handle/123456789/22401

Type
Document de travail / Working paper
External document link
https://doi.org/10.2866/48941
Date
2021
Publisher
European Central Bank
Series title
European Central Bank Working Papers Series
Series number
2477 / October 2020
Published in
Frankfurt am Main
Pages
59
Metadata
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Author(s)
Jaccard, Ivan
European Central Bank [ECB]
Vermandel, Gauthier
Laboratoire d'Economie de Dauphine [LEDa]
Benmir, Ghassane
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 / Keywords
Climate Change; Compensation Effect; Bond Premium Puzzle; Natural Rate of Interest; Optimal Policy; Welfare
JEL
Q58 - Government Policy
G12 - Asset Pricing; Trading Volume; Bond Interest Rates
E32 - Business Fluctuations; Cycles

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