Carbon Dioxide as a Risky Asset
We incorporate the findings from the Intergovernmental Panel on Climate Change’s sixth assessment report into the Carbon Asset Pricing model – AR6 (CAP6) financial asset pricing model that prices CO2 emissions as an asset with negative returns. This framework includes an explicit representation of decision making under uncertainty and risk to be incorporated when considering ‘optimal’ abatement choices; put differently, in our model, policy can be made to ‘hedge’ against serious climate damages.
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.
Working paper and citation
Citation: A. M. Bauer, C. Proistosescu, and G. Wagner. Carbon Dioxide as a Risky Asset. CESifo Working Paper No. 10278 and CEEP Working Paper No. 23, 2023. Link to CESifo.
All source code for the Carbon Asset Pricing model – AR6 can be found on my Github.
American Geophysical Union Fall Meeting, December 2022; Columbia University Sustainable Development Seminar, Novermber 2022; CIRES-CSEF Seminar at UC Boulder, April 2023; AERE2023 Meeting, May 2023; EAERE2023 Meeting, June 2023.