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The Rising Cost of Climate Change: Evidence from the Bond Market

Michael Bauer () and Glenn Rudebusch ()

No 2020-25, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The level of the social discount rate (SDR) is a crucial factor for evaluating the costs of climate change. We demonstrate that the equilibrium or steady-state real interest rate is the fundamental anchor for market-based SDRs. Much recent research has pointed to a decrease in the equilibrium real interest rate since the 1990s. Using new estimates of this decline, we document a pronounced downward shift in the entire term structure of SDRs in recent decades. This lower new normal for interest rates and SDRs has substantially boosted the estimated economic loss from climate change and the social cost of carbon.

Keywords: social discount rate; cost of carbon; natural rate of interest; r-star (search for similar items in EconPapers)
JEL-codes: E43 E44 H43 Q54 (search for similar items in EconPapers)
Pages: 39
Date: 2020-07-07
New Economics Papers: this item is included in nep-ene, nep-env and nep-mac
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DOI: 10.24148/wp2020-25

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Handle: RePEc:fip:fedfwp:88357