“Climate Change and Growth Risks” by Dana Kiku
University of Illinois at Urbana-Champaign
Federal Reserve Board
We use the forward-looking information from global capital markets to estimate the elasticity of equity prices to temperature fluctuations and find that global warming has a significant negative effect on asset valuations. We also find that the negative elasticity of prices has been increasing over time, suggesting that the impact of climate change has been rising. We use our empirical work to calibrate a long-run risks model with temperature-induced disasters that affect future output and growth. 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 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.