Working Paper: NBER ID: w23009
Authors: Ravi Bansal; Marcelo Ochoa; Dana Kiku
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.
Keywords: Climate Change; Economic Growth; Social Cost of Carbon
JEL Codes: E0; G0; Q0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rise in temperature (Q54) | decline in equity valuations (G12) |
| preference for early resolution of uncertainty (D81) | significant social cost of carbon (Q52) |
| temperature impacts on output (E23) | decrease in social cost of carbon (D61) |
| power utility preferences (L94) | negligible social cost of carbon (D61) |
| temperature-induced natural disasters (Q54) | negative effect on economic growth (F69) |
| rise in temperature (Q54) | increased disaster risks (H84) |
| increased disaster risks (H84) | impacts economic stability and growth (F65) |