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The carbon bubble : climate policy in a fire-sale model of deleveraging
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1830-7728
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EUI MWP; 2020/04
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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
Abstract
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.