Tag Archives: Environment

Green Returns

In the NBER working paper “Dissecting Green Returns,” Lubos Pastor, Robert Stambaugh, and Lucian Taylor argue that excess returns on green assets during recent years are unlikely to predict expected excess returns. At least that’s what theory suggests:

… green assets have lower expected returns than brown, due to investors’ tastes for green assets, yet green assets can have higher realized returns while agents’ tastes shift unexpectedly in the green direction. … green tastes can shift in two ways. First, investors’ preference for green assets can increase, directly driving up green asset prices. Second, consumers’ demands for green products can strengthen—for example, due to environmental regulations—driving up green firms’ profits and thus their stock prices.

In the data

… green stocks significantly outperformed brown stocks in recent years. … green stocks would not have outperformed brown without strengthened climate concerns. …

The bulk of the positive relation between green stock returns and climate-concern shocks evidently occurs with multi-week lags.

Expected returns on stocks are hard to identify, in contrast with expected bond returns. That’s why the authors analyze bond prices and yields:

The inverse relation between a bond’s realized return and the change in its yield to maturity is well understood, and the yield provides direct information about expected return, especially for buy-and-hold investors.

The case of German “twin” bonds illustrates this inverse relation in the context of climate concerns. Since 2020, the German government has issued green bonds, along with virtually identical non-green twins. The green bonds trade at lower yields, indicating lower expected returns compared to non-green bonds. The yield spread between the green and non-green twins, known as the “greenium,” reflects investors’ willingness to accept a lower return in exchange for holding assets more aligned with their environmental values. Since issuance, the 10-year greenium experienced roughly a three-fold widening, presumably due to growing climate concerns. As a result, the green bond outperformed its non-green twin by a significant margin over the same period. However, this outperformance does not imply green outperformance going forward. Rather the opposite is clearly true, given the now wider greenium.

Economic Aspects of the Energy Transition

In an NBER working paper, Geoffrey Heal discusses some aspects of the energy transition to come.

On infrastructure investments:

the likely net investment required to go carbon-free is now as little as $0.179 trillion

renewable power from wind and solar PV plants is now less expensive than power from gas, coal or nuclear plants … If it were not for the intermittency of renewables, we would save money by converting to clean power.

the social benefits from stopping the CO2 emissions from coal and gas in power generation in the U.S. amount to $200bn annually, roughly an order of magnitude greater than the costs. Furthermore, these benefits will continue for ever, whereas the costs are fully paid by 2050. … As greenhouse gases are a global public bad, many of these benefits will accrue to countries other than the U.S.

Carbon taxes only delay the extraction of fossil fuels except for those fuels whose marginal extraction cost is sufficiently high such that extraction cost plus tax exceeds the cost of alternative energy sources:

the Pigouvian and Hotelling frameworks lead to rather different conclusions when it comes to thinking about the effectiveness of a carbon tax. Pigou emphasizes the impact of a tax on substitution between commodities, in this case between energy sources. Hotelling on the other hand emphasizes the impact of a tax on an exhaustible resource on the time-path of consumption of that resource.

[in the Hotelling setting] the tax either has no effect at all on the cumulative consumption of the fossil fuel, or it drives it out of the market completely.

If we want to reduce cumulative oil consumption by for example 30%, then we need a tax of about $500 per ton of CO2: if we wanted to reduce oil consumption by two thirds we would need a tax of over $600 per ton CO2.

Electricity pricing:

The marginal social cost of power from renewable sources is close to zero, as wind, solar and hydro all have essentially zero operating costs. So we would need much lower power prices to provide the correct incentives to use clean power rather than fossil fuels.

The classic response to this conundrum has been to recommend two-part tariffs, with a fixed charge or connection or membership charge recovering the fixed costs and a usage tariff covering the variable costs.

Negative Value Added of Switzerland’s Agricultural Sector

Farmers in Switzerland receive about CHF 2.7 billion in direct financial support annually. Total financial support by the federal and cantonal governments equals more than CHF 4 billion. But according to a report published by Zurich based think tank Avenir Suisse, this financial support constitutes just a minor part of the transfers from society at large to farmers, due to explicit and implicit subsidies, privileges, and—most importantly—negative externalities.

A list of privileges compiled by Avenir Suisse.

Avenir Suisse estimates the value added of Swiss agriculture to be hugely negative.

Die heutige Schweizer Landwirtschaft resultiert in einer negativen Wertschöpfung von minus 15,8 Mrd. Fr. pro Jahr. Damit kostet sie uns umgerechnet rund 1,8 Mio. Fr. pro Stunde.

In the NZZ, Nicole Rütti reports.