The finance of climate change: Transitioning to a low carbon economy

Financial markets play a vital role in the allocation of the world’s resources. Yet financial markets are also prone to booms and busts as financial intermediaries imperfectly respond to the world around them. This thesis examines the role of financial markets in the context of climate change. It examines how financial markets are slowly, though imperfectly, moving towards addressing one of the greatest economic and scientific challenges of our century. I examine in-depth a number of areas where financial markets are operating effectively to address the challenges of climate change. I also identify those areas where market failures signal the need for further government intervention. This thesis proceeds in four substantive chapters. My approach is empirical and employs both quantitative and qualitative techniques. I first address financial market theory on the role of information in efficient market operation (Chapter 3). I then examine behaviourally how financial markets are integrating new climate-related information in investment decisions (Chapter 4). This thesis then examines the two financial markets in depth. The first is an empirical examination of how carbon markets have influenced publicly listed markets in energy stocks within Europe (Chapter 5). The second is an empirical examination of direct investment (venture capital and private equity) in clean technologies in Europe and North America (Chapter 6). Four findings emerge from this thesis: Firstly, financial market reform must begin with greater information disclosure to the market on the physical and carbon-related risks facing corporations and the community. Secondly, large asset owners (such as pension funds) should demand greater integration of long-term systemic risk considerations in their asset allocation decisions if they are to adequately respond to climate change. Thirdly, market structure appears to materially influence the operation of a carbon price signal within an energy market. This indicates further empirical research is needed by governments to examine whether carbon markets achieve their intended aims. Fourthly, the flow of direct investment (private equity) in emerging clean technologies is highly contingent on geography. The size and direction of capital flows is influenced by regulation, capital market structures, and physical environmental variables. Government must bear this in mind when formulating appropriate technology and industry policy to spur clean technology investment.This thesis is currently not available via ORA