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Carbon Dioxide as a Risky Asset

Author

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  • Adam Michael Bauer

    (University of Illinois Urbana-Champaign)

  • Cristian Proistosescu

    (University of Illinois Urbana-Champaign
    University of Illinois Urbana-Champaign)

  • Gernot Wagner

    (Columbia Business School)

Abstract

We develop a financial-economic model for carbon pricing with an explicit representation of decision making under risk and uncertainty that is consistent with the Intergovernmental Panel on Climate Change’s sixth assessment report. We show that risk associated with high damages in the long term leads to stringent mitigation of carbon dioxide emissions in the near term, and find that this approach provides economic support for stringent warming targets across a variety of specifications. Our results provide insight into how a systematic incorporation of climate-related risk influences optimal emissions abatement pathways.

Suggested Citation

  • Adam Michael Bauer & Cristian Proistosescu & Gernot Wagner, 2024. "Carbon Dioxide as a Risky Asset," Climatic Change, Springer, vol. 177(5), pages 1-27, May.
    • Handle: RePEc:spr:climat:v:177:y:2024:i:5:d:10.1007_s10584-024-03724-3
    DOI: 10.1007/s10584-024-03724-3
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