Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/314685 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11646
Publisher: 
CESifo GmbH, Munich
Abstract: 
We build a general equilibrium model to study how climate transition risks affect energy prices and the valuations of different firms in the energy sector. We consider two types of fossil fuel firms: incumbents that have developed oil reserves they can extract today or tomorrow, and new entrants that must invest in exploration and drilling today to have reserves to potentially extract tomorrow. There are also renewable energy firms that produce emission-free energy but cannot currently serve non-electrifiable sectors of the economy. We analyze three sources of climate transition risk: (i) changes in the probability of a technological breakthrough that allows renewable energy firms to serve all economic sectors; (ii) changes in expected future taxes on carbon emissions; and (iii) restrictions on today's development of additional fossil fuel production capacity. We show that the different transition risk—and, importantly, uncertainty about their realizations—have distinct effects on firms' decisions, on their valuations, and on equilibrium energy prices. We provide empirical support for the heterogeneous effects of different transition risks on energy prices and stock returns of firms in different energy sub-sectors.
Subjects: 
climate change
renewable energy
green transition
policy uncertainty
fossil fuel firms
brown firms
carbon tax
drilling restrictions
oil prices
JEL: 
E31
Q35
Q38
Q43
Q54
Q58
Document Type: 
Working Paper
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