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The climate beta

Author

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  • Simon Dietz
  • Christian Gollier
  • Louise Kessler

Abstract

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.

Suggested Citation

  • Simon Dietz & Christian Gollier & Louise Kessler, 2015. "The climate beta," GRI Working Papers 190, Grantham Research Institute on Climate Change and the Environment.
    • Handle: RePEc:lsg:lsgwps:wp190
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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