Climate Change and Growth Risks

39 Pages Posted: 3 Jan 2017

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Marcelo Ochoa

Board of Governors of the Federal Reserve System

Dana Kiku

University of Illinois at Urbana-Champaign

Date Written: December 2016

Abstract

To study the welfare implications of rising temperature we propose a temperature-augmented long-run risks model that accounts for the interaction between temperature, economic growth and risk. 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 negative elasticity of equity prices to temperature risks documented in the data. We use the calibrated model to quantify the social cost of carbon (SCC) and to frame the optimal climate policy. We show that a preference for early resolution of uncertainty and long-run impact of temperature on growth imply a significant SCC and motivate early actions to abate global warming.

Suggested Citation

Bansal, Ravi and Ochoa, Marcelo and Kiku, Dana, Climate Change and Growth Risks (December 2016). NBER Working Paper No. w23009, Available at SSRN: https://ssrn.com/abstract=2892433

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Marcelo Ochoa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Dana Kiku

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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