Optimal emissions under exogenous and endogenous technological change - Frank Venmans | Financial market response to climate litigation against corporations - Misato Sato

Frank Venmans will be discussing the paper Optimal emissions under exogenous and endogenous technological change.

Abstract

Some abatement technologies become cheaper over time, even without climate policy. We call this process “exogenous”, in the sense that it only depends on time. Other abatement technologies become cheaper only as a result of costly abatement. This process is therefore “endogenous” since the decision to abate will also affect later abatement costs. On a welfare maximizing path, the marginal abatement costs now equals the social cost of carbon plus the social gain of learning. The social gain of learning will flatten the optimal carbon path. This is also the case in a cost-effectiveness setting, such that the optimal carbon price no longer follows a Hotelling rule. We show that very few models include this extra incentive, yet we estimate that modelling endogenous learning as an exogenous process underestimates optimal abatement by 9% in 2050. Compared to a model with a static marginal abatement curve, both endogenous and exogenous TC will lower optimal peak warming and steepen the abatement path due to the declining costs of abatement. In anticipation of lower peak warming, exogenous TC will reduce the initial carbon price, whereas endogenous TC has an ambiguous effect on the initial carbon price in a cost-benefit setting.

Misato Sato will be discussing the paper Financial Market Response to Climate Litigation Against Corporations

Abstract

One motivation behind the rising wave of litigation against high emitting corporations is to steer capital markets away from high emitting activities. We construct a new, comprehensive database of climate change related lawsuits against corporations in the U.S. and Europe during the period 2005–2021, and classify them according to key characteristics. We find that climate litigation filings do not affect stock prices on average. However, stock markets do respond negatively to particular types of climate litigation, specifically filings against Carbon Majors and “novel” cases, including first filings against a corporation, first filings in a given jurisdiction, and filings of cases that use novel legal arguments, or unfavourable judgements against corporations. These findings suggest litigation is affecting market valuation of companies, and litigation risk is increasingly becoming part of climate-related financial risk.

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