Climate Transition Risks and the Energy Sector, with Viral
Acharya, Stefano Giglio, Stefano Pastore, Johannes
Stroebel and Zhenhao Tan. Revise and Resubmit in the Review of
Financial Studies.
[+] Abstract
We build a general equilibrium model to study how climate transition risks affect
energy prices and the valuations of different firms in the energy sector. We consider two types of fossil
fuel firms: incumbents that have developed oil reserves they can extract today or tomorrow, and new entrants
that must invest in exploration and drilling today to have reserves to potentially extract tomorrow. There
are also renewable energy firms that produce emission-free energy but cannot currently serve
non-electrifiable sectors of the economy. We analyze three sources of climate transition risk: (i) changes
in the probability of a technological breakthrough that allows renewable energy firms to serve all economic
sectors; (ii) changes in expected future taxes on carbon emissions; and (iii) restrictions on today's
development of additional fossil fuel production capacity. We show that different transition risks—and,
importantly, uncertainty about their realizations—have distinct effects on firms' decisions, on their
valuations, and on equilibrium energy prices. We provide empirical support for the heterogeneous effects of
different transition risks on energy prices and stock returns of firms in different energy
sub-sectors.
Mechanisms of financial contagion, my undergraduate thesis reviewing existing literature on financial contagion in the banking network, and introducing a new theoretical framework to explain relative impacts of different mechanisms of contagion.