The Carbon Bubble: climate policy in a fire-sale model of deleveraging

David Comerford, Alessandro Spiganti

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)
16 Downloads (Pure)

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. We embed the Carbon Bubble in a macroeconomic model exhibiting a financial accelerator: if investors are leveraged, then the Carbon Bubble might precipitate a fire‐sale of assets across the economy, and generate a large and persistent fall in output and investment, impairing the economy's ability to invest in the zero carbon assets it needs to produce output in the post‐climate‐transition world. We find a role for macroeconomic policy protecting investors' balance sheets in mitigating the macroeconomic effects of the Carbon Bubble, and enhancing welfare.
Original languageEnglish
Pages (from-to)655-687
Number of pages33
JournalScandinavian Journal of Economics
Volume125
Issue number3
Early online date12 Jun 2023
DOIs
Publication statusPublished - 31 Jul 2023

Keywords

  • degree target
  • decarbonisation
  • stranded assets
  • macro-financial policies

Fingerprint

Dive into the research topics of 'The Carbon Bubble: climate policy in a fire-sale model of deleveraging'. Together they form a unique fingerprint.

Cite this