Climate, Financial Markets and the Economy

Course Director: Gualtiero Azzalini

Climate change is one of the most important challenges of our time. After touching upon the basics of the science behind climate change, this course aims to provide students with the tools to understand (i) the links between the climate and the economy (ii) the effectiveness of different climate policies and (iii) the role of financial markets in managing climate-related risks and in the green transition. Students will learn how different models and techniques can be used to make sense of climate-related phenomena, identify and gauge climate-related risks, and evaluate climate policies. By applying these frameworks and performing empirical analyses in the assignments, students will also gain quantitative skills essential for any job in finance or economics.

FORMAT & STRUCTURE

The course consists of lectures and seminars. During seminars, students will go through the assignments and/or additional material with the teaching assistant. Subject to availability, there will also be one or two lectures with guest speakers, which will allow the students to gain insights into how practitioners and policymakers deal with climate-related issues.

CONTENT

The course will cover the following topics:

• Basics of the science of climate change
• A simplified version of the DICE Integrated Assessment Model
• Mechanics and implications of different climate policies
• The stochastic discount factor and how to use it to rationalize climate-related risks
• Empirical evidence on the impact of climate risk on different assets
• Green innovation and the role of finance and policy
• Discounting

Course administrator: Kirandeep.Saini@hhs.se

Upon successful completion of the course, students should be able to:

1. Be aware of the science behind climate change and of the relationships between the climate and the economy, with a special focus on the link between economic growth and emissions and the relevance of climate change for households' and firms' decisions;
2. Assess the uncertainties surrounding climate-economy relationships and climate policies and the resulting climate-related risks;
3. Discuss the role of financial markets in hedging climate-related risks and in the green transition;
4. Analyze the mechanics of different climate policies, the relevance of cost-benefit analysis to gauge their impacts, and the importance of discounting for evaluating long-term effects;
5. Use the tools and contents learned in the course to develop an informed assessment of the impact of climate policies and of factors affecting the climate-economy relationships.

Students are expected to be familiar with basic asset pricing theory, basic optimization theory, the linear regression framework, and the basic concepts of economic growth theory. They are also expected to have some experience with performing data management and analyses with any statistical software (e.g., Python, Julia, Matlab).

There is no required textbook. Lecture notes, slides and references to research papers will be provided.

Examples of references:

• J. Hassler, P. Krusell, and A.A. Smith. Chapter 24 - environmental macroeconomics. In John B. Taylor and Harald Uhlig, editors, Handbook of Macroeconomics, volume 2, pages 1893–2008. Elsevier, 2016a.
• Hassler John, Krusell Per, and Jonas Nycander. Climate Policy. Economic Policy, 2016, vol. 31, issue 87, 503-558.
• William D. Nordhaus and Joseph Boyer. Warming the World: Economic Models of Global Warming. The MIT Press,
  2000.
• William D. Nordhaus. The Climate Casino. New Haven: Yale University Press, 2013.
• John Cochrane. Asset Pricing: Revised Edition. Princeton University Press, 2009.
• Stefano Giglio, Bryan Kelly, and Johannes Stroebel. Climate finance. Annual Review of Financial Economics, 13(1): 15–36, 2021a.

Grading will be based on three mandatory homework assignments (30% of the final grade in total) and an individual final exam (70% of the final grade).

There will also be a fourth mandatory individual assignment (pass or fail).

In the assignments, students will be asked to answer theoretical questions related to the material seen in class, perform empirical analyses, and use the computer to solve models.

The homework assignments are due at the beginning of the TA seminar specified in the detailed course outline. Code must be provided and has to be well-commented and easy to read.

The final exam will be a closed book written exam. Detailed instructions on the exam will be given in due course.

Find the course schedule in TimeEdit

Have you been granted educational support because of a documented disability? If so, please contact the course director as soon as possible so that adequate accommodations can be made.

Contact specialneeds@hhs.se if you have questions about being granted educational support or need a copy of your educational support certificate.

For more information, visit the Specific Educational Needs page on the Student Hub (login required).