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Barnett, S358, Michael Laybourn, Mendocino Brewing Co., 2/6/95 [videorecording].

Climate Change and Uncertainty: An Asset Pricing Perspective

I document key empirical facts about the time-series and cross-sectional effects of climate change and climate model uncertainty on production and asset prices, and construct a model that highlights the mechanisms needed to replicate these facts. Empirically, I find that higher temperatures increase green energy use, whereas economic downturns increase fossil fuel reliance. I estimate a negative climate risk price that is magnified by rising temperatures. Negatively (positively) exposed firms display higher (lower) returns as climate change intensifies. These empirical results are most significant during the last 20 years. Using a production-based model where the consumption good is produced using a mix of cheap, polluting oil and expensive, clean green energy, I show the importance of non-linear climate impacts and agents with recursive preferences and aversion to climate model uncertainty for replicating these facts. I use the calibrated model to show how alternative climate scenarios will impact future outcomes.

Computer typesetting; experiments and prospects