Pricing Uncertainty Induced by Climate Change

Michael Barnett, William Brock, Lars Hansen and Harrison Hong

The Review of Financial Studies, 2020, vol. 33, issue 3, 1024-1066

Abstract: Geophysicists examine and document the repercussions for the earth’s climate induced by alternative emission scenarios and model specifications. Using simplified approximations, they produce tractable characterizations of the associated uncertainty. Meanwhile, economists write highly stylized damage functions to speculate about how climate change alters macroeconomic and growth opportunities. How can we assess both climate and emissions impacts, as well as uncertainty in the broadest sense, in social decision-making? We provide a framework for answering this question by embracing recent decision theory and tools from asset pricing, and we apply this structure with its interacting components to a revealing quantitative illustration.

JEL-codes: D81 E61 G12 G18 Q51 Q54 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (112)

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