The Pricing of Global Temperature Shocks in the Cost of Equity Capital
56 Pages Posted: 22 May 2020
Date Written: April 26, 2020
Using an APT model where global temperature shocks are a systematically priced factor, the risk premium is significant and positive. Evidence is provided that positive exposure to temperature shocks is related to increasing CO2 emissions by an industry or region. The global impact on the cost of equity could be as high as 2.8% per year, implying a global GDP loss of $2.2 Trillion per year due to global temperature shocks.
Keywords: asset pricing, climate change, cost of capital, tracking portfolio
JEL Classification: G12, Q54.
Suggested Citation: Suggested Citation