Carbon Taxes and Stranded Assets: Evidence from Washington State

Arbeitspapier

The climate challenge requires ambitious climate policy. A sudden increase in carbon prices can lead to major shocks to the stock market. Some assets will lose part of their value, others all of it, and hence become “stranded”. If the markets are not ready to absorb the shock, a financial crisis could follow. How well investors anticipate, and thus how large these shocks may be, is an empirical question. We analyze stock market reactions to the rejection of two carbon tax initiatives by voters in Washington state. We build proper counterfactuals for Washington state firms and find that these modest policy proposals with limited jurisdiction caused substantial readjustments on the stock market, especially for carbon-intensive stocks. Our results reinforce concerns about “stranded assets” and the risk of financial contagion. Our policy implications support the inclusion of transition risks in macroprudential policymaking and carbon disclosure and climate stress tests as the main policy responses.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7785

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; State and Local Taxation, Subsidies, and Revenue ; Regulation and Industrial Policy: General ; Environmental Economics: Government Policy
• Subject: carbon pricing ; financial returns ; systemic risk ; macroprudential policies ; voting

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Carattini, Stefano ; Sen, Suphi
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/202011
• Last update: 10.03.2025, 11:43 AM CET