“Climate change is not only a flow problem, but also a stock problem”

During his stay as an academic guest at our department in the spring semester 2026, Felix Matthys, Assistant Professor at the Business School of Instituto Tecnológico Autónomo de México (ITAM), presented his research in our Finance Seminar series with the talk "Beyond Carbon Pricing: Integrating Mitigation, Adaptation, and Carbon Removal". 

Prof. Matthys holds a PhD in Finance from the University of Zurich (2014) and was a visiting research collaborator at Princeton University’s Bendheim Center for Finance and earned a master’s degree in quantitative finance from ETH Zurich and the University of Zurich.

We caught up with him after his seminar talk to discuss the ideas behind his presentation, his latest publication, and his research on climate finance and environmental policy. He also reflects on his academic journey from Switzerland to Mexico and how it has shaped his work.

Dear Prof. Matthys, you are an Academic Guest at the UZH Department of Finance during the spring semester 2026. What motivated you to choose UZH and our department for your academic research?

There are several good reasons to come (back) to the UZH Department of Finance.

First, and foremost, it is a very strong department, with excellent professors and is well connected within the global research community.

Second, after all these years, I still work with Prof. Markus Leippold on several projects and thus it makes a lot of sense to me to come back here and continue our work.

Third, I also have a research project with Prof. Patrick Cheridito from the ETH Zurich, which is located just next to the University of Zurich. This proximity of the two institutions makes it very convenient for me. Finally, Zurich is my hometown, where I still have family and lots of dear friends which I enjoy seeing again.

Could you briefly describe your main research interests and explain what motivated you to pursue this focus?

My main research interests are in asset pricing, broadly defined, with a particular focus on uncertainty in financial markets.

I am especially interested in developing theoretical models that can be taken to the data and used to understand real-world financial problems. Across my work, I have studied different forms of uncertainty, including model uncertainty, economic policy uncertainty, the distinction between uncertainty and volatility, political uncertainty in currency markets, investor sentiment, climate-related uncertainty, and the pricing of downside macroeconomic risk.

What motivates this focus is that uncertainty is central to almost every important decision in finance. Investors, firms, intermediaries, and policymakers rarely know the true model, the relevant probabilities, or the full consequences of their actions. Yet financial markets must price assets, allocate capital, and manage risk precisely in these environments. This makes uncertainty both intellectually interesting and economically important.

I am particularly drawn to questions where uncertainty changes behavior and prices in ways that standard models may miss. For example, uncertainty affects virtually any decision we take, from portfolio choice, risk premia, yield curves, option prices, currency markets, and the design of climate or financial policy. My goal is to build models that clarify these mechanisms, generate testable predictions, and help explain observed market outcomes.

You gave a presentation at one of our department’s finance seminars titled “Beyond Carbon Pricing: Integrating Mitigation, Adaptation, and Carbon Removal”, which is based on ongoing joint work with Prof. Markus Leippold. Could you briefly share your research question and key findings?

What motivated us to write this paper is the growing gap between the climate targets set out in the Paris Agreement and the actual pace of global climate action.

Although many countries have committed to ambitious long-run targets, current policies remain insufficient to put the world on a credible path toward limiting global warming to well below 2°C. Global emissions remain high, fossil fuels continue to account for a large share of global energy supply, and the remaining carbon budget is rapidly shrinking. This suggests that the central policy challenge is no longer simply whether we should price carbon, but whether carbon pricing alone can deliver the required transition at a feasible economic and political cost.

Our paper argues that it cannot. In principle, a Pigouvian carbon tax remains the benchmark instrument for internalizing the emissions externality. However, implementing a carbon tax high enough to meet the 2°C target would require very large increases in the price of carbon and would trigger substantial divestment from dirty capital. Since dirty capital still plays an important role in global production and energy supply, such an adjustment would impose large transition costs and could be politically difficult to sustain. The relevant policy problem is therefore a second-best one: if the first-best carbon tax is not fully implementable, what combination of policy instruments can still achieve climate stabilization while keeping the transition economically feasible?

The key insight of the paper is that climate change is not only a flow problem, but also a stock problem. Carbon taxes and clean-capital subsidies help reduce new emissions by making polluting inputs less attractive and clean investment more profitable. However, they do not directly address the already elevated stock of CO₂ in the atmosphere, which continues to drive temperature increases even if new emissions are reduced. Because this legacy stock will decline only very slowly through natural absorption, carbon dioxide removal is not merely a distant backstop technology; it is a necessary component of any credible stabilization strategy.

At the same time, carbon removal cannot be the only solution. Current removal technologies remain expensive and cannot yet be deployed at the scale required to substitute for mitigation. Similarly, relying exclusively on carbon taxes would impose excessive costs on the economy, while relying only on clean subsidies would not remove the existing atmospheric stock. Adaptation is also essential because, given the slow progress toward climate goals, some climate damages over the coming decades are now unavoidable. Adaptation investment therefore protects the economic base by making the economy more resilient to climate-related disasters and other physical damages.

The broader message of our paper is that optimal climate policy requires a portfolio approach. Carbon pricing targets current emissions, clean subsidies accelerate the transition toward low-carbon production, carbon dioxide removal manages the accumulated stock of atmospheric CO₂, and adaptation reduces the economic damages from warming that can no longer be avoided. These instruments are complements rather than substitutes. A single policy instrument either pushes too much adjustment onto one constrained margin or becomes prohibitively expensive. By contrast, an integrated climate policy mix can achieve stabilization at a more feasible cost and can adjust over time as technologies improve, climate risks evolve, and the structure of the economy changes.

In this sense, the paper is motivated by a cautious but still constructive view of climate policy. The transition is already late, and the adjustment required is substantial. But our results suggest that it is not necessarily too late to avoid the worst outcomes, provided policy moves beyond a narrow focus on carbon pricing and instead adopts a coordinated mix of mitigation, clean-technology support, carbon removal, and adaptation.

Could you tell us about a current research project you are particularly interested in and why?

Ufff, this is a difficult question for me to answer as I really enjoy working on all my projects.

I also like the different research questions each project is focusing on plus the fact that I can work with many excellent scholars is truly a blessing. That said, if I must pick a few, I think the climate policy paper with Markus Leippold and the new ideas I am working on with Chiara Colesanti Senni on the global impact of biodiversity loss, deserve to be mentioned here I do care about the well-being of nature.

Switzerland and Mexico are quite far apart geographically and culturally. What led you to build your academic career at ITAM in Mexico, and how has this move influenced your work?

Yes, this is a good question indeed.

First, it has to do with the fact that I met my wife Prof. Fernanda Marquez while completing my PhD in Princeton. She is originally from Mexico City – even did her undergraduate degree at ITAM where I am currently working – and has been a tremendous support in making the transition from the US to Mexico very smooth.

Secondly, it also had to do with the vision of Prof. Francisco Perez Gonzalez and Prof. Cecilia Ortiz to build up a top business school with a clear focus on excellence, not only on the teaching side, but also in research. 

Over the past couple of years, I believe we have made significant progress to achieve this, which is very nice to see, but we still have to improve further.

Looking ahead, with so many global developments affecting financial markets and climate policy, how do you see these dynamics shaping your future research? And more broadly, what is your view of the future in your field?

Looking ahead, I think these global developments will reinforce the main direction of my research.

Financial market participants have always had to operate under substantial uncertainty, so in that sense uncertainty itself is not new. What feels different today is that several major sources of uncertainty are occurring at the same time: geopolitical conflicts, trade tensions, technological change, and the increasingly visible consequences of climate change. This makes it even more important to understand how uncertainty is measured, how it is priced, and how it affects decisions in financial markets.

At the same time, I am encouraged by the progress being made in better accounting for the impact that economic activity has on nature and the climate. But I also think we have to be realistic. Implementing effective global climate policy will be extremely challenging in practice, especially because of political economy constraints, distributional conflicts, and the fact that many economies still depend heavily on fossil-fuel-based production.

My own view is cautiously constructive. The challenges are substantial, and we should not underestimate them. But I do believe that finance and economics can contribute to making sustainable economic growth and a healthier relationship with nature less of an abstract goal and more of a realistic policy objective.

Thank you very much for taking the time to speak with us and for sharing your research and personal academic journey. It has been a pleasure getting to know you during your time at our department.

We greatly appreciated the inspiring conversations and wish you every success in your future research and career!

Research Seminars

The Department of Finance hosts a series of weekly research seminars throughout the semester. Internationally renowned scholars present and discuss their latest research projects, offering valuable insights into current developments in financial research. The seminars are open to all interested academics, students, and practitioners who wish to engage with innovative ideas and foster academic exchange.

Find out more: Research Seminars