Essays in macro-finance and the environment

Benmir, Ghassane (2023) Essays in macro-finance and the environment. PhD thesis, London School of Economics and Political Science.

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Abstract

In this thesis I investigate the linkages between environmental policy and macro-financial aggregates. The first chapter shows that well-designed environmental policies could lead to lower risk premiums and higher real interest rates. By correcting the externality responsible for climate change, the optimal policy reduces the welfare cost of business cycle fluctuations. This decline in aggregate risk in turn lowers the compensation demanded by investors for holding risky assets as well as the need for precautionary savings. The second chapter expands the scope of the first chapter, where a non-separable externality dis-utility function is introduced, and where I formulate a tractable extension of the model that captures both production damages and market frictions, namely price stickiness. In this chapter I show that utility-based damages allow for better capturing macro-financial dynamics while significantly reducing emissions, in contrast to the production damages specification. Monetary policy is shown to play an important role in emission reduction, however, a trade-off is introduced as central banks work to stabilize interest rates and inflation, or alternatively, allow for higher emission reduction rates. The third chapter builds on the first two chapter and studies the drivers of EU Futures ETS carbon pricing. This chapter uses a macro-finance model to estimate the shock decomposition of the CO2 price in the data, where we use both a novel data set and strategy to estimate the abatement and policy shocks. This chapter finds that the ETS price is mainly driven by energy, climate sentiment, and abatement shocks. Relative to the social cost of carbon (i.e. the optimal policy), the volatility of the ETS price is 10 times higher. Finally, I show how reducing price uncertainty using a carbon cap rule, can help close the volatility gap with respect to the first best policy.

Item Type:	Thesis (PhD)
Additional Information:	© 2023 Ghassane Benmir
Library of Congress subject classification:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance H Social Sciences > HJ Public Finance
Sets:	Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Supervisor:	Taschini, Luca and Dietz, Simon and Moll, Benjamin
URI:	http://etheses.lse.ac.uk/id/eprint/4705

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