Carbon taxes and stranded assets: evidence from Washington state

Carbon pricing is the most cost-effective policy to address the climate challenge. Following the Paris Agreement, a first acceleration in the implementation of carbon pricing schemes has been observed and can expect a further acceleration over the next few years, as countries ratchet up their climate goals under their Paris commitments. The authors of this paper show that while a convergence towards relatively high carbon prices is more than welcome from a climate perspective, central banks and other agencies responsible for financial stability may need to play close attention to such development. Without macroprudential policies, any sudden increase in carbon prices can lead to major shocks to the stock market. Some assets will 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.

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