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What Do Capital Markets Tell Us About Climate Change?

Author

Listed:
  • Marcelo Ochoa

    (Federal Reserve Board of Governors)

  • Dana Kiku

    (University of Ilinois)

  • Ravi Bansal

    (Duke University)

Abstract

We use the forward-looking information from the US and global capital markets to estimate the economic impact of long-run temperature fluctuations. We find that global warming has a significant negative effect on asset valuations and that temperature risks carry a negative price. We also find that the negative elasticity of equity prices to temperature risks have been increasing over time, which suggests that the impact of climate change on the macro-economy has been rising. We use our empirical evidence to calibrate a long-run risks model with temperature-induced disasters in future output and growth and quantify the social cost of carbon emissions. The model simultaneously matches the projected temperature path, the observed consumption growth dynamics, discount rates provided by the risk-free rate and equity market returns, and the estimated temperature elasticity of equity prices. We show that a preference for early resolution of uncertainty and long-run impact of temperature on growth imply a significant social cost of carbon emissions.

Suggested Citation

  • Marcelo Ochoa & Dana Kiku & Ravi Bansal, 2016. "What Do Capital Markets Tell Us About Climate Change?," 2016 Meeting Papers 542, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:542
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    References listed on IDEAS

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    Cited by:

    1. Benedict Clements & Sanjeev Gupta & João Jalles & Bernat Adrogue, 2023. "Climate Change and Government Borrowing Costs: A Triple Whammy for Emerging Market Economies," Working Papers REM 2023/0295, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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