What Do Capital Markets Tell Us About Climate Change?

Marcelo Ochoa, Dana Kiku and Ravi Bansal
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Marcelo Ochoa: Federal Reserve Board of Governors
Dana Kiku: University of Ilinois

No 542, 2016 Meeting Papers from Society for Economic Dynamics

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.

Date: 2016
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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Citations: View citations in EconPapers (2)

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