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The climate beta

Dietz, Simon, Gollier, Christian and Kessler, Louise (2018) The climate beta. Journal of Environmental Economics and Management, 87. pp. 258-274. ISSN 0095-0696

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Identification Number: 10.1016/j.jeem.2017.07.005

Abstract

How does climate-change mitigation affect the aggregate consumption risk borne by future generations? In other words, what is the ‘climate beta’? In this paper we argue using a combination of theory and integrated assessment modelling that the climate beta is positive and close to unity for maturities of up to about one hundred years. This is because the positive effect on the climate beta of uncertainty about exogenous, emissions-neutral technological progress overwhelms the negative effect on the climate beta of uncertainty about the carbon-climate-response, particularly the climate sensitivity, and the damage intensity of warming. Mitigating climate change therefore has no insurance value to hedge the aggregate consumption risk borne by future generations. On the contrary, it increases that risk, which justifies a relatively high discount rate on the expected benefits of emissions reductions. However, the stream of undiscounted expected benefits is also increasing in the climate beta, and this dominates the discounting effect so that overall the net present value of carbon emissions abatement is increasing in the climate beta.

Item Type: Article
Official URL: https://www.journals.elsevier.com/journal-of-envir...
Additional Information: © 2017 The Authors
Divisions: Grantham Research Institute
Subjects: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 20 Jul 2017 10:16
Last Modified: 20 Jun 2019 00:03
Projects: ES/K006576/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/83605

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