Transition Risks and Market Failure

Transition Risks and Market Failure: A Theoretical Discourse on Why Financial Models and Economic Agents may Misprice Risk Related to the Transition to a Low-carbon Economy

This paper provides a theoretical discourse linking traditional market failure literature and research around potential stranded assets risks associated with the transition. It demonstrates the extent to which the market failure literature provides theoretical evidence of a potential mispricing of these risks, as a result of the design and interpretation of financial risk models, and the practices and institutions linked to economic agents.