Working Paper: NBER ID: w22529
Authors: Ravi Bansal; Dana Kiku; Marcelo Ochoa
Abstract: We use the forward-looking information from the US and global capital markets to estimate the economic impact of global warming, specifically, long-run temperature shifts. We find that global warming carries a positive risk premium that increases with the level of temperature and that has almost doubled over the last 80 years. Consistent with our model, virtually all US equity portfolios have negative exposure (beta) to long-run temperature fluctuations. The elasticity of equity prices to temperature risks across global markets is significantly negative and has been increasing in magnitude over time along with the rise in temperature. We use our empirical evidence to calibrate a long-run risks model with temperature-induced disasters in distant output growth to quantify the social cost of carbon emissions. 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 estimated temperature elasticity of equity prices. We find that the long-run impact of temperature on growth implies a significant social cost of carbon emissions.
Keywords: Global warming; Capital markets; Social cost of carbon
JEL Codes: G00; G12; Q43; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Temperature fluctuations (E32) | Equity valuations (G12) |
| Higher temperatures (Q54) | Increased risk premiums in equity markets (G19) |
| Temperature increases (E31) | Negative exposure beta to long-run temperature fluctuations (C46) |
| Temperature risks (L93) | Elasticity of equity prices (G12) |
| Temperature increases (E31) | Social cost of carbon emissions (Q52) |
| Temperature fluctuations (E32) | Asset valuations (G19) |