Carbon Dioxide as a Risky Asset

Climate economics

Project goal

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.

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.

Full paper and citation

Link to full paper. (forthcoming in Climatic Change, Columbia CEEP Working Paper No. 23, CESifo Working Paper No. 10278; this version: 3/13/2024)

Citation: Bauer, A. M., C. Proistosescu, and G. Wagner. Carbon Dioxide as a Risky Asset. Climatic Change (forthcoming), 2024.

In press

Project code

All source code for the Carbon Asset Pricing model – AR6 can be found on my Github.

Collaborators

Cristi Proistosescu and Gernot Wagner.

Presentations

American Geophysical Union Fall Meeting, December 2022
Columbia University Sustainable Development Seminar, Novermber 2022
CIRES-CSEF Seminar at UC Boulder, April 2023
Association of Environmental and Resource Economists Summer Meeting, May 2023
European Association of Environmental and Resource Economists Summer Meeting Meeting, June 2023
Midwestern Student Conference on Atmospheric Research, October 2023.