Date of Award

2022

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Graduate Group

Finance

First Advisor

Joao F. Gomes

Abstract

In the first chapter, "Climate Finance in Financial Markets", I propose a model that determinesthe discount rate on large-scale climate change mitigation projects. In the model, climate change is present through disasters that destroy capital. Disaster probability is endogenous and grows with emissions that evolve with new investments in carbon-intensive capital. I show that large-scale projects or policies aimed at abating climate change should be discounted with a rate significantly lower than the market rate. I also show the additional losses the economy will incur if the policy awaits several years to start. Finally, I show that only the transition risks rather than the physical risks can explain the green premium and reconcile the theoretical predictions with historical observations. The second chapter, "Climate Change Adaptation in Financial Markets", proposes a model that determines the appropriate discount rate on projects that adapt to climate change. In addition, it helps determine the best time to start implementing climate policy. The model is production-based and features endogenous climate-related disasters. It suggests that the discount rate on climate change adaptation projects is lower than that on the risk-free rate and that it is optimal to start investing in them as soon as possible. The third chapter, "Adapting to Climate Change: A Disaster-Based Asset Pricing Model", co-authored with Jessica A. Wachter, answers a similar question but with a different approach. In the model, disaster probability increases in the temperature anomaly as soon as the latter surpasses a tipping point. The model suggests that the discount rate on climate change adaptation projects reaches zero as soon as the tipping point is reached while the climate beta becomes negative at that time.

Share

COinS