Stranded Assets: How Policy Uncertainty affects Capital, Growth, and the Environment

Abstract The paper considers stochastic environmental policy and its effects on the environment, portfolio composition, economic growth. Capital accumulation causes pollution which is reduced by private green services public abatement. government subsidizes taxes dirty capital albeit at a rate may become random, causing unexpected write-offs. Tax jumps depend natural degradation activism. We derive how uncertainty political activism affect risk premia for investors. analyze incentives firms to increase greenness of production in order reduce uncertainty. Stochastic taxation shown act as substitute subsidies when decreases ratio agents use their activities strategically. trigger precautionary savings, additional growth enhanced deterioration.