Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299239 
Year of Publication: 
2024
Series/Report no.: 
Deutsche Bundesbank Discussion Paper No. 17/2024
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
We study climate change in a model with a carbon-intensive and a green sector, each subject to stochastic 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 depend on the elasticity of substitution between the two sectors and the relative size of the sectors, and vary during the green transition. The time path of the climate risk premium is hump-shaped, with the climate beta playing a dominant role in its magnitude. For strong substitutability between the two sectors and low correlation between the sectoral shocks, decarbonization 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
ISBN: 
978-3-95729-992-5
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.