Reference

Simon Dietz, Christian Gollier, and Louise Kessler, The climate beta, Journal of Environmental Economics and Management, 2018, forthcoming.

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.

Keywords

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

JEL codes

  • Q54: Climate • Natural Disasters • Global Warming

Research partnerships

Amundi
Scor Chair

Research theme

Risk Attitude

Replaces

Simon Dietz, Christian Gollier, and Louise Kessler, The climate beta, IDEI Working Paper, n. 856, November 2015.