Paper: arXiv 2410.00902

Authors: Michael Barnett

Abstract

I study the dynamic, general equilibrium implications of climate-change-linked transition risk on macroeconomic outcomes and asset prices. Climate-change-linked expectations of fossil fuel restrictions can produce a run on fossil fuels'' with accelerated production and decreasing spot prices, or a reverse run’’ with restrained production and increased spot prices. The response depends on the expected economic consequences of the anticipated transition shock, and existing climate policies. Fossil fuel firm prices decrease in each case. I use a novel empirical measure of innovations in climate-related transition risk likelihood to show that dynamic empirical responses are consistent with a ``run on fossil fuel.''

Complexity vs Empirical Score

  • Math Complexity: 8.0/10
  • Empirical Rigor: 7.5/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper presents a sophisticated dynamic general equilibrium model combining endogenous climate dynamics, Poisson jump transition risks, and asset pricing. It pairs high theoretical math complexity with empirical validation via event studies and structural VAR analysis on a hand-collected narrative climate transition index.

Research Flowchart

  flowchart TD
    A["Research Goal:<br>Analyze macro & asset price impacts of climate transition risk"] --> B["Build Dynamic General Equilibrium Model<br>with fossil fuel production & policy expectations"]
    
    B --> C["Develop Empirical Measure:<br>Innovations in climate transition risk likelihood"]
    
    C --> D["Model Simulation & Empirical Analysis:<br>Test 'Run' vs. 'Reverse Run' conditions"]
    
    D --> E1["Theory Finding:<br>Expectations cause 'Run' (accelerated supply/lower spot price) or 'Reverse Run'"]
    D --> E2["Empirical Finding:<br>Data confirms a 'Run on Fossil Fuel' & falling fossil firm equity prices"]

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