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

38 Pages Posted: 12 Aug 2020

See all articles by Michael Bauer

Michael Bauer

Universit├Ąt Hamburg

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco

Date Written: July 7, 2020

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

JEL Classification: E43, E44, Q54, H43

Suggested Citation

Bauer, Michael and Rudebusch, Glenn D., The Rising Cost of Climate Change: Evidence from the Bond Market (July 7, 2020). Available at SSRN: https://ssrn.com/abstract=3649958 or http://dx.doi.org/10.2139/ssrn.3649958

Michael Bauer (Contact Author)

Universit├Ąt Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

HOME PAGE: http://www.michaeldbauer.com

Glenn D. Rudebusch

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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