Emanuele Campiglio
Vienna University of Economics and Business

Abstract:

The structural shift to a low-carbon economic system involves macroeconomic and financial risks that might not yet be fully internalised by markets, due to a combination of limited information, bounded rationality and economic incentives.  We study the effect of these climate-related financial biases on the speed and smoothness of the low-carbon transition  by means of a multi-sector macroeconomic model with two productive technologies – high-carbon and low-carbon. Investments in physical capital by non-financial firms and investments in financial assets (equities) by financial investors are driven by different factors and may thus be misaligned. This appears evident already in our baseline scenario, in which the transition produces some significant macroeconomic and financial fluctuations. We then  allow investors to develop varying degrees of “apathetic” expectations around the development of the low-carbon sector and to hold limited perceptions, or “blindness” regarding the actual size of either capital sector. We find a substantial nonlinear interaction between apathy and blindness in the value of stranded assets.

Emanuele Campiglio is Assistant Professor at the Vienna University of Economics and Business (WU), where he leads the research area in Climate Economics and Finance, and Visiting Fellow at the Grantham Research Institute of the London School of Economics and Political Science (LSE). His research focuses on the links between macro-financial systems and sustainability transitions. He is the recipient of a ERC Starting Grant for the SMOOTH project (Sustainable Finance for a Smooth Low-Carbon Transition). He is also a principal investigator in the CASCADES (H2020), WINDOW (OeNB) and GreenMacro (Mistra) projects.

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