25 June 2024

The impact of climate change policies on economy and financial markets

In his PhD thesis, Maximilian Konradt contributes to two research agendas in macroeconomics and finance. The first aims to understand the impact of climate change policies on the economy and financial markets, and the second focuses on the effects of the low interest rate environment on financial institutions.

How did you choose your research topics?

After starting the PhD, I was initially interested in macroeconomics and finance. I quickly realised that there were many open questions in this area related to climate change and I was drawn to these topics. Climate change is the challenge of our time, and we as researchers can contribute to a better understanding of how to tackle it.  

Can you describe your PhD essays?

My dissertation consists of four chapters.

Chapter 1 asks how carbon pricing affects financial institutions’ investments in the equity market. I combine granular data on portfolio holdings with carbon prices in Europe to analyse the trading of shares of carbon-intensive companies by these institutions. I find that mutual funds respond to carbon pricing by reducing their exposure to carbon-intensive firms. The response critically depends on investors’ preferences for sustainability.

The second chapter focuses on the impact of carbon taxes on consumer prices. Together with my coauthor, Beatrice Weder di Mauro, we combine data on 18 carbon taxes in Europe and Canada over the past three decades with economic variables to estimate the dynamic effects of carbon taxes on consumer price inflation. We find that carbon taxes have not been inflationary in aggregate but did change relative prices, increasing the cost of energy.

Chapter 3 compares the effects of different types of climate policies, namely carbon taxes and the European Union Emissions Trading Scheme (EU ETS), a cap-and-trade system. Together with my coauthor, Diego Känzig, we quantify and compare the effects of higher carbon taxes and ETS prices within a unified empirical framework. Our results suggest that while both policies are effective in reducing emissions, carbon price changes in the EU ETS have a larger economic cost.

The final chapter shifts gears a bit and asks how the low interest rate environment of most of the 2000s has affected the investment behaviour of pension funds. I assemble a novel database of more than 100 pension funds from most advanced economies to show that fund balance sheets have become riskier in the recent period. I document that the low interest rate environment helps to explain this pattern.

What could the policy implications of the thesis?

The thesis provides relevant insights for understanding the implications of climate change policies. Designing these policies in an equitable way that does not impede growth is critical to their long-term success and public acceptance. One lesson from my work is that while climate change policies reduce emissions, they can also have economic effects that need to be taken into account in policy design.

What are you doing now?

I am going to be a postdoctoral researcher at NYU Stern.

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Maximilian Konradt defended his PhD thesis in International Economics on 30 April 2024. Professor Nathan Sussman presided over the committee, which included Professor Cédric Tille and Professor Beatrice Weder di Mauro, Thesis Co-Supervisors, and, as External Reader, Professor Marcin Kacperczyk, Imperial College London.

Citation of the PhD thesis: 
Konradt, Maximilian. “Essays in International Finance and Macroeconomics.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2024.
Interested readers can access the individual chapters (upon publication) on Dr Konradt’s webpage.

Interview by Nathalie Tanner, Research Office.
Banner image: SynthEx/Shutterstock.