Carbon Dioxide as a Risky Asset

Adam Michael Bauer, Cristian Proistosescu and Gernot Wagner

No 10278, CESifo Working Paper Series from CESifo

Abstract: We develop a financial-economic model for carbon pricing with an explicit representation of decision making under risk and uncertainty that is consistent with the Intergovernmental Panel on Climate Change’s sixth assessment report. We find that this approach provides economic support for the warming targets in the Paris Agreement across a variety of specifications. We show that risk associated with high damages in the long term leads to stringent mitigation of carbon dioxide emissions in the near term. Our results provide insight into how a systematic incorporation of climate-related risk influences ‘optimal’ emissions abatement pathways.

Keywords: climate risk; asset pricing; cost of carbon (search for similar items in EconPapers)
JEL-codes: G00 G12 Q51 Q54 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10278

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