Green Asset Pricing

61 Pages Posted: 6 Oct 2020 Last revised: 18 Nov 2021

See all articles by Ivan Jaccard

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research

Ghassane Benmir

London School of Economics and Political Science

Gauthier Vermandel

CMAP, Ecole polytechnique, Institut Polytechnique de Paris; LEDa, Paris-Dauphine & PSL Universities; Banque de France

Date Written: October, 2020

Abstract

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.

JEL Classification: Q58, G12, E32

Suggested Citation

Jaccard, Ivan and Benmir, Ghassane and Vermandel, Gauthier, Green Asset Pricing (October, 2020). ECB Working Paper No. 20202477, Available at SSRN: https://ssrn.com/abstract=3706133 or http://dx.doi.org/10.2139/ssrn.3706133

Ivan Jaccard (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Ghassane Benmir

London School of Economics and Political Science

Gauthier Vermandel

CMAP, Ecole polytechnique, Institut Polytechnique de Paris ( email )

Route de Saclay
Palaiseau, 91128
France

LEDa, Paris-Dauphine & PSL Universities ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

Banque de France ( email )

Paris
France

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