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The climate beta

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  • Dietz, Simon
  • Gollier, Christian
  • Kessler, Louise

Abstract

Mitigation reduces the expected future damages from climate change,flbut how does it affect the aggregate risk borne by future generations?flThis raises the question of the ‘climate beta’, i.e., the elasticity of climatefldamages with respect to a change in aggregate consumption. Inflthis paper we show that the climate beta is positive if the main sourceflof uncertainty is exogenous, emissions-neutral technological progress,flimplying that mitigation has no hedging value. But these results areflreversed if the main source of uncertainty is related to the carbonclimate-flresponse and the damage intensity of warming. We then showflthat in the DICE integrated assessment model the climate beta is positivefland close to unity. In estimating the social cost of carbon, thisflwould justify using a relatively high rate to discount expected climatefldamages. However, the stream of undiscounted expected climate damagesflis also increasing in the climate beta. We show that this dominatesflthe discounting effect, so that the social cost of carbon is in fact largerflthan when discounting expected damages at the risk-free rate.

Suggested Citation

  • Dietz, Simon & Gollier, Christian & Kessler, Louise, 2015. "The climate beta," IDEI Working Papers 856, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:29903
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    References listed on IDEAS

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    1. Rob Aalbers, 2009. "Discounting investments in mitigation and adaptation: a dynamic stochastic general equilibrium approach of climate change," CPB Discussion Paper 126, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Christian Gollier, 2012. "Pricing the Planet's Future: The Economics of Discounting in an Uncertain World," Economics Books, Princeton University Press, edition 1, number 9894.
    3. T. Heller & R. Huet & Bénédicte Vidaillet, 2013. "Introduction," Post-Print hal-00848256, HAL.
    4. Simon Dietz & Nicholas Stern, 2015. "Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions," Economic Journal, Royal Economic Society, vol. 0(583), pages 574-620, March.
    5. Dietz, Simon & Asheim, Geir B., 2012. "Climate policy under sustainable discounted utilitarianism," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 321-335.
    6. Dietz, Simon & Stern, Nicholas, 2015. "Endogenous growth, convexity of damage and climate risk: how Nordhaus’ framework supports deep cuts in carbon emissions," LSE Research Online Documents on Economics 58406, London School of Economics and Political Science, LSE Library.
    7. van den Bijgaart, Inge & Gerlagh, Reyer & Liski, Matti, 2016. "A simple formula for the social cost of carbon," Journal of Environmental Economics and Management, Elsevier, vol. 77(C), pages 75-94.
    8. P. R. Kumaraswamy, 2013. "Introduction," China Report, , vol. 49(1), pages 1-3, February.
    9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
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    11. Kent D. Daniel & Robert B. Litterman & Gernot Wagner, 2016. "Applying Asset Pricing Theory to Calibrate the Price of Climate Risk," NBER Working Papers 22795, National Bureau of Economic Research, Inc.
    12. Kelly, David L. & Kolstad, Charles D., 2001. "Malthus and Climate Change: Betting on a Stable Population," Journal of Environmental Economics and Management, Elsevier, vol. 41(2), pages 135-161, March.
    13. Nicholas Stern, 2013. "The Structure of Economic Modeling of the Potential Impacts of Climate Change: Grafting Gross Underestimation of Risk onto Already Narrow Science Models," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 838-859, September.
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    Cited by:

    1. Daniel Harenberg & Stefano Marelli & Bruno Sudret & Viktor Winschel, 2017. "Uncertainty Quantification and Global Sensitivity Analysis for Economic Models," CER-ETH Economics working paper series 17/265, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    2. Michael Spackman, 2017. "Social discounting: the SOC/STP divide," GRI Working Papers 182, Grantham Research Institute on Climate Change and the Environment.

    More about this item

    Keywords

    beta; climate change; discounting; integrated assessment; flmitigation; risk; social cost of carbon;

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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