Structural Change and the Climate Risk Premium during the Green Transition

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 10840

Classification and Topics

• Classification: Wirtschaft ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General ; Asset Pricing; Trading Volume; Bond Interest Rates ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; One, Two, and Multisector Growth Models ; Climate; Natural Disasters and Their Management; Global Warming
• Subject: social cost of carbon ; climate beta ; carbon risk premium ; two-sector model ; asset pricing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Zhou, Sophie ; van der Ploeg, Frederick
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/282528
• Last update: 10.03.2025, 11:43 AM CET