Carbon taxes and stranded assets: Evidence from Washington state
NOVEMBER 25, 2020
Abstract: The climate challenge requires ambitious climate policy. If investors are not aligned with long-term climate goals, a sudden increase in carbon prices may lead some assets to lose part of their value, others all of it, and hence become “stranded”. If the markets are not ready to absorb the shock, a financial crisis could follow. We analyze the rejection of two carbon tax initiatives in Washington state and find that these modest policy proposals caused substantial readjustments in the stock market, especially for carbon-intensive stocks. The effects that we identify are of similar magnitude than simulations of complete asset stranding. Our findings reinforce concerns about “stranded assets” and the risk of financial contagion and support the inclusion of transition risks in macroprudential policymaking.