Niko Jaakkola

• Endogenous climate policy, systemic risk and asset stranding (w/ Achim Hagen, Angelika Vogt)

• A regulator sets a carbon tax under stochastic climate change. Severe climate change demands high carbon taxes. The resulting downward pressure on fossil-related asset prices may precipitate a systemic financial crisis. We identify two equilibria: one is associated with carbon-intense investments and low carbon taxes, the other with a rapid fossil fuel phase-out and high taxes. A Pigovian tax on fossil investment takes into account the marginal systemic risk and yields a constrained efficient outcome. We also propose third-best instruments
  which eliminate the carbon-intense equilibrium: (1) increasing the equity buffer of the banking system; (2) increasing the wedge between the cost of funding fossil versus renewable assets; (3) separating fossil assets into a ’brown bank’ network not connected to the rest of the financial sector. We argue that financial supervision cannot ignore climate concerns.

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