Climate Change and Long-Run Discount Rates: Evidence from Real Estate

Stefano Giglio, Matteo Maggiori, Johannes Stroebel and Andreas Weber

No 21767, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The optimal investment to mitigate climate change crucially depends on the discount rate used to evaluate the investment’s uncertain future benefits. The appropriate discount rate is a function of the horizon over which these benefits accrue and the riskiness of the investment. In this paper, we estimate the term structure of discount rates for an important risky asset class, real estate, up to the very long horizons relevant for investments in climate change abatement. We show that this term structure is steeply downward-sloping, reaching 2.6% at horizons beyond 100 years. We explore the implications of these new data within both a general asset pricing framework that decomposes risks and returns by horizon and a structural model calibrated to match a variety of asset classes. Our analysis demonstrates that applying average rates of return that are observed for traded assets to investments in climate change abatement is misleading. We also show that the discount rates for investments in climate change abatement that reduce aggregate risk, as in disaster-risk models, are bounded above by our estimated term structure for risky housing, and should be below 2.6% for long-run benefits. This upper bound rules out many discount rates suggested in the literature and used by policymakers. Our framework also distinguishes between the various mechanisms the environmental literature has proposed for generating downward-sloping discount rates.

JEL-codes: G11 G12 R30 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (40)

Published as Stefano Giglio & Matteo Maggiori & Krishna Rao & Johannes Stroebel & Andreas Weber & Stijn Van Nieuwerburgh, 2021. "Climate Change and Long-Run Discount Rates: Evidence from Real Estate," The Review of Financial Studies, vol 34(8), pages 3527-3571.

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Related works:
Journal Article: Climate Change and Long-Run Discount Rates: Evidence from Real Estate (2021)
Working Paper: Climate Change and Long-Run Discount Rates: Evidence from Real Estate (2015)
Working Paper: Climate Change and Long-Run Discount Rates: Evidence from Real Estate (2015)
Working Paper: Climate Change and Long-Run Discount Rates: Evidence from Real Estate (2015)
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