The climate beta
How does climate-change mitigation affect the aggregate consumption risk borne by future generations? In other words, what is the ‘climate beta’?
Using a combination of theory and integrated assessment modelling, the authors of this paper argue that the climate beta is positive and close to unity for maturities of up to about 100 years. This is because the positive effect on the climate beta of uncertainty about exogenous, emissions-neutral technological progress overwhelms the negative effect on the climate beta of uncertainty about the carbon-climate-response, particularly the climate sensitivity, and the damage intensity of warming.
Mitigating climate change therefore has no insurance value to hedge the aggregate consumption risk borne by future generations. In fact, on the contrary, it increases that risk, which justifies a relatively high discount rate on the expected benefits of emissions reductions. However, the stream of undiscounted expected benefits is also increasing in the climate beta, and this dominates the discounting effect so that overall the net present value of carbon emissions abatement is increasing in the climate beta.
This is an updated version of a paper first published in June 2016.