Dataset Information

Declining CO₂ price paths.

ABSTRACT: Pricing greenhouse-gas (GHG) emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. While decision making under risk and uncertainty is the forte of financial economics, important insights from pricing financial assets do not typically inform standard climate-economy models. Here, we introduce EZ-Climate, a simple recursive dynamic asset pricing model that allows for a calibration of the carbon dioxide ([Formula: see text]) price path based on probabilistic assumptions around climate damages. Atmospheric [Formula: see text] is the "asset" with a negative expected return. The economic model focuses on society's willingness to substitute consumption across time and across uncertain states of nature, enabled by an Epstein-Zin (EZ) specification that delinks preferences over risk from intertemporal substitution. In contrast to most modeled [Formula: see text] price paths, EZ-Climate suggests a high price today that is expected to decline over time as the "insurance" value of mitigation declines and technological change makes emissions cuts cheaper. Second, higher risk aversion increases both the [Formula: see text] price and the risk premium relative to expected damages. Lastly, our model suggests large costs associated with delays in pricing [Formula: see text] emissions. In our base case, delaying implementation by 1 y leads to annual consumption losses of over 2%, a cost that roughly increases with the square of time per additional year of delay. The model also makes clear how sensitive results are to key inputs.

SUBMITTER: Daniel KD

PROVIDER: S-EPMC6800385 | biostudies-literature | 2019 Oct

REPOSITORIES: biostudies-literature

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Declining CO<sub>2</sub> price paths.

Daniel Kent D KD Litterman Robert B RB Wagner Gernot G

Proceedings of the National Academy of Sciences of the United States of America 20191001 42

Pricing greenhouse-gas (GHG) emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. While decision making under risk and uncertainty is the forte of financial economics, important insights from pricing financial assets do not typically inform standard climate-economy models. Here, we introduce EZ-Climate, a simple recursive dynamic asset pricing model that allows for a calibration of the carbon dioxide ([Formula: see text]) price path based on ...[more]

PMID: 31575747

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Declining CO₂ price paths.

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Declining CO<sub>2</sub> price paths.

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Declining CO<sub>2</sub> price paths.

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Declining CO₂ price paths.