Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282528 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10840
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We study climate change in a model with a carbon-intensive and a green sector, each subject to stochastic sectoral productivity shocks, and show how the underlying economic structure affects the risk-adjusted discount rate and the climate risk premium in the social cost of carbon (SCC). Consumption growth, aggregate consumption volatility, and the climate beta are all affected by the elasticity of substitution between the two sectors and the relative size of the sectors, and vary as the green transition progresses. The climate risk premium is hump-shaped during the green transition, with the climate beta playing a dominant role in its magnitude. For sufficiently strong substitutability between the two sectors and sufficiently low correlation between the sectoral shocks, decarbonisation can temporarily reduce aggregate consumption risk, as the climate beta becomes negative in the mid phase of the transition. The risk-adjusted discount rate first falls then rises during the green transition, leading to a SCC to GDP ratio that rises then falls as the green sector grows. We illustrate our analytical results numerically.
Subjects: 
social cost of carbon
climate beta
carbon risk premium
two-sector model
asset pricing
JEL: 
E60
G12
H23
O41
Q54
Document Type: 
Working Paper
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