Arbeitspapier

Structural Change and the Climate Risk Premium during the Green Transition

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.

Language
Englisch

Bibliographic citation
Series: CESifo Working Paper ; No. 10840

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

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

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Zhou, Sophie
  • van der Ploeg, Frederick
  • Center for Economic Studies and ifo Institute (CESifo)

Time of origin

  • 2023

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