Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model

Gregory Casey, Stephie Fried and William B. Peterman

AEA Papers and Proceedings, 2026, vol. 116, 517-521

Abstract: We study the impact of climate policy on the long-run real interest rate in a neoclassical growth model. A carbon price reduces the long-run rate only if it grows faster than at least one fossil fuel price. Consider a carbon price that grows at 5 percent per year. This tax reduces the long-run rate by 25 basis points if fossil fuel prices grow at their historical rates and by 77 basis points if they are constant. A carbon price that implements the least-cost path to net zero reduces the long-run rate by up to 54 basis points.

JEL-codes: E43 O41 Q35 Q54 (search for similar items in EconPapers)
Date: 2026
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Working Paper: Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model (2024)
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DOI: 10.1257/pandp.20261026

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