Pricing Uncertainty Induced by Climate Change

52 Pages Posted: 22 Aug 2019 Last revised: 14 Nov 2019

See all articles by Michael Barnett

Michael Barnett

Arizona State University (ASU) - Finance Department

William A. Brock

University of Wisconsin, Madison - Department of Economics; University of Missouri at Columbia - Department of Economics

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 13, 2019

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 in a revealing quantitative illustration.

Suggested Citation

Barnett, Michael and Brock, William A. and Hansen, Lars Peter, Pricing Uncertainty Induced by Climate Change (November 13, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-109. Available at SSRN: https://ssrn.com/abstract=3440301 or http://dx.doi.org/10.2139/ssrn.3440301

Michael Barnett

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

William A. Brock

University of Wisconsin, Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-263-6655 (Phone)
608-263-3876 (Fax)

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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