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The climate beta

Listed author(s):
  • Simon Dietz
  • Christian Gollier
  • Louise Kessler

Reducing emissions of CO2 today is expected to reduce climate damages in the future. In this paper, we examine the question of whether fighting climate change has the additional advantage of reducing the aggregate risk borne by future generations. This raises the question of the ‘climate beta’, i.e. the elasticity of climate damages with respect to a change in aggregate consumption. Using the DICE integrated assessment model, we show that the climate beta is positive and close to unity, due above all to the effect of uncertainty about technological progress. In estimating the social cost of carbon, this justifies using a relatively larger rate to discount expected climate damages. On the other hand, expected climate damages are themselves made larger by this effect and overall the NPV of emissions reductions today is increased by the climate beta.

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File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2015/04/Working-Paper-190-Dietz-et-al.pdf
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Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 190.

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Date of creation: Apr 2015
Handle: RePEc:lsg:lsgwps:wp190
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  1. 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.
  2. P. R. Kumaraswamy, 2013. "Introduction," China Report, , vol. 49(1), pages 1-3, February.
  3. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
  4. 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.
  5. Ottmar Edenhofer , Brigitte Knopf, Terry Barker, Lavinia Baumstark, Elie Bellevrat, Bertrand Chateau, Patrick Criqui, Morna Isaac, Alban Kitous, Socrates Kypreos, Marian Leimbach, Kai Lessmann, Bertra, 2010. "The Economics of Low Stabilization: Model Comparison of Mitigation Strategies and Costs," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
  6. 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.
  7. 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, June.
  8. 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.
  9. T. Heller & R. Huet & Bénédicte Vidaillet, 2013. "Introduction," Post-Print hal-00848256, HAL.
  10. 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, 03.
  11. 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.
  12. Simon Dietz & Nicholas Stern, 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.
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