Date: 2020
Type: Working Paper
The carbon bubble : climate policy in a fire-sale model of deleveraging
Working Paper, EUI MWP, 2020/04
COMERFORD, David, SPIGANTI, Alessandro, The carbon bubble : climate policy in a fire-sale model of deleveraging, EUI MWP, 2020/04 - https://hdl.handle.net/1814/67434
Retrieved from Cadmus, EUI Research Repository
Credible implementation of climate change policy, consistent with the 2°C limit, requires a large proportion of current fossil fuel reserves to remain unused. This issue, named the Carbon Bubble, is usually presented as a required asset write-off, with implications for investors. For the first time, we discuss its implications for macroeconomic policy. We embed the Carbon Bubble in a macroeconomic model exhibiting a financial accelerator: if investors are leveraged, the Carbon Bubble may precipitate a fire-sale of assets across the economy, and generate a large and persistent fall in output and investment. We find a role for policy in mitigating the Carbon Bubble.
Cadmus permanent link: https://hdl.handle.net/1814/67434
ISSN: 1830-7728
Series/Number: EUI MWP; 2020/04
Publisher: European University Institute
Keyword(s): Carbon Bubble Fire-sale Deleveraging Resource substitution 2°C target Q43 H23