Applying Asset Pricing Theory to Calibrate the Price of Climate Risk
Open accessAbstract
Pricing greenhouse gas emissions involves making trade-offs between consumption today and unknown damages in the (distant) future.This setup calls for an optimal control model to determine the carbon dioxide (CO2) price.It also relies on society's willingness to substitute consumption across time and across uncertain states of nature, the forte of Epstein-Zin preference specifications.We develop the EZ-Climate model, a simple discrete-time optimization model in which uncertainty about the effect of CO2 emissions on global temperature and on eventual damages is gradually resolved over time.We embed a number of features including potential tail risk, exogenous and endogenous technological change, and backstop technologies.The EZ-Climate model suggests a high optimal carbon price today that is expected to decline over time as uncertainty about the damages is resolved.It also points to the importance of backstop technologies and to very large deadweight costs of delay.We decompose the optimal carbon price into two components: expected discounted damages and the risk premium.
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Quantifying the economic risks of climate change
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Climate risk: The price of drought
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Climate change, risk factors and stock returns: A review of the literature
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Climate change and corporate cash holdings: Global evidence
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The Social Cost of Carbon: Valuing Inequality, Risk, and Population for Climate Policy
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High water, no marks? Biased lending after extreme weather
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Environmental, Social, and Governance Criteria: Why Investors are Paying Attention
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Climate Change and Firm Valuation: Evidence from a Quasi-Natural ExperimentPreprint
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Climate Sensitivity and Predictable Returns
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Sustainable portfolio management under climate change
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Timing Is Everything: How Economists Can Better Address the Urgency of Stronger Climate Policy
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Benedetti, D., Biffis, E., Chatzimichalakis, F., Fedele, L. L., & Simm, I. (2018) · Annals of Operations Research · doi:10.1007/s10479-019-03458-x · Cited by 49 · see citing works
Carbon emission and credit default swaps
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Williams, R. C. (2016) · National Bureau of Economic Research · doi:10.3386/w22303 · Cited by 42 · see citing works
Environmental reputation and bank liquidity: Evidence from climate transition
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Pricing Carbon and Adjusting Capital to Fend Off Climate Catastrophes
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Green bonds: Do investors benefit from third-party certification?
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Voice Through DivestmentPreprint
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Measuring preferences over the temporal resolution of consumption uncertainty
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Does Carbon Risk Influence Stock Price Crash Risk? International Evidence
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Hedging Climate Change NewsPreprint
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The Role of Uncertainty in Controlling Climate Change
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Climate Risks and Market Efficiency
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Reflections–Managing Uncertain Climates: Some Guidance for Policy Makers and Researchers
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Self-citationClimate Change and Financial Policy: A Literature Review
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Verified carbon emissions and stock returns in the EU Emissions Trading System
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The Greenium Matters: Evidence on the Pricing of Climate RiskPreprint
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Pension Funds and Sustainable Investment
Hammond, P. B., Maurer, R., & Mitchell, O. S. (2023) · doi:10.1093/oso/9780192889195.001.0001 · Cited by 16 · see citing works
Climate risk and capital structure*
(2022) · Climate Change and Law Collection · doi:10.1163/9789004322714_cclc_2019-0162-614 · Cited by 15 · see citing works
Does climate risk influence analyst forecast accuracy?
Kim, I., Lee, S., & Ryou, J. W. (2024) · Journal of Financial Stability · doi:10.1016/j.jfs.2024.101345 · Cited by 13 · see citing works
Climate risk and green innovation‐ESG disconnect: Firm‐level evidence from China
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Prescriptivism, Risk Aversion, and Intertemporal Substitution in Climate EconomicsPreprint
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Self-citationAn uncertainty-based risk management framework for climate change risk
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The Information Content of Managers’ Climate Risk Disclosure
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Climate Tipping Points and Non-Linear Risk Pricing in Financial MarketsPreprint
Lontzek, T. S., Pohl, W., Schmedders, K. H., Thalhammer, M., & Wilms, O. (2023) · SSRN Electronic Journal · doi:10.2139/ssrn.4473164 · Cited by 11 · see citing works
Does political risk exacerbate climate risk? Firm-level evidence
Basha, S. A., Benkraiem, R., Ben‐Nasr, H., & Masum, A. A. (2025) · International Review of Financial Analysis · doi:10.1016/j.irfa.2025.104282 · Cited by 9 · see citing works
Responses of financial stress and monetary policy to global warming: Evidence from China
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Carbon Dioxide as a Risky Asset
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Self-citationFinancial System Stability, the Timing of Climate Change Action and the Federal Reserve
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An Economic Anatomy of Optimal Climate PolicyPreprint
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Self-citationDo Short Sellers Target Firms with High Climate Risks? International Evidence
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Climate Change in the Theory of Finance
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The Role of Uncertainty and Risk in Climate Change EconomicsPreprint
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Navigating Climate Risk in Financial Markets: New Theories and Insights for Asset Pricing
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Carbon regulatory risk exposure in the bond market: A quasi-natural experiment in China
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Bank activities and the evolving exposures of banks and society to climate disasters
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Climate Sensitivity Uncertainty: When is Good News Bad?
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Self-citationESG Equity Investing: A Short SurveyPreprint
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Impact of Climate Change Hazard: Carbon Risk on Stock Returns and Asset PricingPreprint
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Explaining Green Returns in a Production EconomyPreprint
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(2022) · Climate Change and Law Collection · doi:10.1163/9789004322714_cclc_2019-0162-613 · Cited by 3 · see citing works
Bitcoin Mining and Electricity ConsumptionPreprint
Dai, M., Kou, S. G., Qian, S., & Qin, L. (2021) · SSRN Electronic Journal · doi:10.2139/ssrn.3994797 · Cited by 3 · see citing works
Climate change risk, investor sentiment, and the performance of new entrant firms
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The Economics of Climate ChangePreprint
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Climate Change and Industrial Performance: Evidence from Remote Sensing DataPreprint
Ding, Y., Sun, C., & Xu, J. (2022) · SSRN Electronic Journal · doi:10.2139/ssrn.4162313 · Cited by 2 · see citing works
Carbon Dioxide as a Risky AssetPreprint
Bauer, A. M., Proistosescu, C., & Wagner, G. (2023) · SSRN Electronic Journal · doi:10.2139/ssrn.4368206 · Cited by 2 · see citing works
Self-citationDoes Carbon Risk Influence Stock Price Crash Risk? International EvidencePreprint
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An Austrian Critique of Using Carbon Taxes to Manage Climate Catastrophe Risk
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Climate Change and Industrial Performance: Evidence from Remote Sensing DataPreprint
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Droughts drying up dividends!Preprint
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Carbon Dioxide as a Risky AssetPreprint
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Self-citationShort Selling PollutersPreprint
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Market Reaction to Extreme Weather Events in the Electricity SectorPreprint
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The COVID-19 pandemic as a “black swan” event—Comparisons with natural disaster shocks
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A real effect of climate-related shareholder proposals: Diversification
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Pricing Abnormal Weather Risks in Chinese Stock MarketPreprint
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Mitigating the impact of extreme heat: spatial diversification and corporate investment
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Pricing abnormal weather risks in Chinese stock marketPreprint
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Climate Risk Ripple Effects on Global Energy Returns and Tail ExtremePreprint
Cao, H., Yin, L., & zhu, X. (2026) · SSRN Electronic Journal · doi:10.2139/ssrn.6414857
Forward‐Looking ESG Relevance and Corporate Performance: Evidence From Credit Ratings
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- Authors
- Daniel, K., Litterman, R., & Wagner, G.
- Affiliations
- Tufts University (US)
- ORCID
- Wagner, Gernot
- Venue
- National Bureau of Economic Research
- Publisher
- National Bureau of Economic Research
- Published
- 2016-11
- OpenAlex
- W2181820239
- Cited by
- 91
- References
- 128
- Citations by year
- 2026: 5 · 2025: 10 · 2024: 10 · 2023: 15 · 2022: 9 · 2021: 10 · 2020: 6 · 2019: 8 · 2018: 7 · 2017: 4 · 2016: 5 · 2015: 2
- Type
- report
- Language
- en
- Open access
- green
- doi.org
- Locations
- National Bureau of Economic Research (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- National Bureau of Economic Research (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Climate Change Policy and Economics
- Social Sciences › Economics, Econometrics and Finance › Finance › Capital Investment and Risk Analysis
- Physical Sciences › Environmental Science › Global and Planetary Change › Climate Change and Geoengineering
- Keywords
- carbon pricing, climate risk, greenhouse gas emissions, Epstein-Zin preferences, optimal control, tail risk, technological change, backstop technology, risk premium, climate damages
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