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Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model

Author

Listed:
  • Gregory Casey
  • Stephie Fried
  • William B. Peterman

Abstract

We study the impact of climate policy on the long-run real interest rate in a neoclassical growth model. A carbon price reduces the long-run rate only if it grows faster than at least one fossil fuel price. Consider a carbon price that grows at 5 percent per year. This tax reduces the long-run rate by 25 basis points if fossil fuel prices grow at their historical rates and by 77 basis points if they are constant. A carbon price that implements the least-cost path to net zero reduces the long-run rate by up to 54 basis points.

Suggested Citation

  • Gregory Casey & Stephie Fried & William B. Peterman, 2026. "Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model," AEA Papers and Proceedings, American Economic Association, vol. 116, pages 517-521, May.
    • Handle: RePEc:aea:apandp:v:116:y:2026:p:517-521
    DOI: 10.1257/pandp.20261026
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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