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The Rising Cost of Climate Change: Evidence from the Bond Market

Author

Listed:
  • Michael D. Bauer

    (Universität Hamburg, CEPR, and CESifo)

  • Glenn D. Rudebusch

    (Brookings Institution and New York University)

Abstract

Social discount rates (SDRs) are crucial for evaluating the costs of climate change. We show that the fundamental anchor for market-based SDRs is the equilibrium or steady-state real interest rate. Empirical interest rate models that allow for shifts in this equilibrium real rate find that it has declined notably since the 1990s, and this decline implies that the entire term structure of SDRs has shifted lower as well. Accounting for this new normal of persistently lower interest rates substantially boosts estimates of the social cost of carbon and supports a climate policy with stronger carbon mitigation strategies.

Suggested Citation

  • Michael D. Bauer & Glenn D. Rudebusch, 2023. "The Rising Cost of Climate Change: Evidence from the Bond Market," The Review of Economics and Statistics, MIT Press, vol. 105(5), pages 1255-1270, September.
    • Handle: RePEc:tpr:restat:v:105:y:2023:i:5:p:1255-1270
    DOI: 10.1162/rest_a_01109
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    Citations

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    Cited by:

    1. Ma, Feng & Guo, Yangli & Luo, Qin & Zhong, Juandan, 2025. "Forecasting corporate bond returns amid climate change risk: A dynamic forecast combination approach," Journal of International Money and Finance, Elsevier, vol. 154(C).
    2. Kopits, Elizabeth & Kraynak, Daniel & Parthum, Bryan & Rennels, Lisa & Smith, David & Spink, Elizabeth & Griffiths, Charles & Perla, Joseph & Burns, Nshan & Howerton, Michael, 2025. "Economic Damages from Climate Change to U.S. Populations: Integrating Evidence from Recent Studies," National Center for Environmental Economics-NCEE Working Papers 368258, United States Environmental Protection Agency (EPA).
    3. J. Doyne Farmer & John Geanakoplos & Matteo G. Richiardi & Miquel Montero & Josep Perelló & Jaume Masoliver, 2024. "Discounting the Distant Future: What Do Historical Bond Prices Imply about the Long-Term Discount Rate?," Mathematics, MDPI, vol. 12(5), pages 1-25, February.
    4. Christensen, Jens H.E. & Lopez, Jose A. & Mussche, Paul L., 2024. "International evidence on extending sovereign debt maturities," Journal of International Money and Finance, Elsevier, vol. 141(C).
    5. repec:sus:susewp:0724 is not listed on IDEAS
    6. Emanuel Moench & Robin Schaal, 2025. "The impact of extreme weather events on the term structure of sovereign debt," Working Papers 11088, South African Reserve Bank.
    7. Peng, Pei & Guo, Yangli & Huang, Dengshi & Wang, Hui, 2025. "Climate change risk and bond risk premium," International Review of Financial Analysis, Elsevier, vol. 97(C).
    8. Meng, Weizhen & Chen, Tuyue & Yang, Jinqiang, 2025. "The economic and policy consequences of carbon emissions," Journal of Mathematical Economics, Elsevier, vol. 117(C).
    9. Jinchi Dong & Richard S. J. Tol & Fangzhi Wang, 2024. "Towards a representative social cost of carbon," Papers 2404.04989, arXiv.org.
    10. Yuan, Xue & Dong, Yu & Liang, Liang & Wei, Yuting, 2025. "The impact of carbon emission trading scheme policy on information asymmetry in the stock market: Evidence from China," Energy Policy, Elsevier, vol. 198(C).
    11. Dietrich, Alexander M. & Müller, Gernot J. & Schoenle, Raphael S., 2024. "Big news: Climate-disaster expectations and the business cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 227(C).
    12. Bauer, Adam Michael & Hallegatte, Stephane & McIsaac, Florent, 2024. "The Timing versus Allocation Trade-off in Politically Constrained Climate Policies," Policy Research Working Paper Series 10971, The World Bank.
    13. Benkraiem, Ramzi & Dimic, Nebojsa & Piljak, Vanja & Swinkels, Laurens & Vulanovic, Milos, 2025. "Media-based climate risks and international corporate bond market," Journal of International Money and Finance, Elsevier, vol. 151(C).
    14. repec:sus:susewp:0824 is not listed on IDEAS
    15. Mongelli, Francesco Paolo & Pointner, Wolfgang & van den End, Jan Willem, 2022. "The effects of climate change on the natural rate of interest: a critical survey," Working Paper Series 2744, European Central Bank.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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