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  5. Climate Change, Risks, and Macroeconomic Policy
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Climate Change, Risks, and Macroeconomic Policy

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

Parc 55
Hosted By: American Economic Association
  • Chair: Anastasios Karantounias, University of Surrey

How Should Climate Change Uncertainty Impact Social Valuation and Policy?

Michael Barnett
,
Arizona State University
William A. Brock
,
University of Wisconsin and University of Missouri-Columbia
Lars Peter Hansen
,
University of Chicago
Hong Zhang
,
Argonne National Laboratory

Abstract

We study the uncertain transition to a carbon-neutral economy. The requisite
technological innovation is made more probable through research and development
(R&D). We explore multiple channels of economic and geoscientific uncertainties that
impact this transition, and we show how to assess the relative importance of their varied
contributions. We represent the social benefit of R&D and cost of global warming as
expected discounted values of social payoffs using a probability measure adjusted for
concerns about model misspecification and prior ambiguity. Our quantitative results
show the value of R&D investment even when the timing of its technological success is
highly uncertain.

800,000 Years of Climate Risk

Tobias Adrian
,
International Monetary Fund
Nina Boyarchenko
,
Federal Reserve Bank of New York
Domenico Giannone
,
University of Washington
Dulani Seneviratne
,
International Monetary Fund
Yanzhe Xiao
,
International Monetary Fund

Abstract

We use a long history of global temperature and atmospheric carbon dioxide (CO2) concentration to
estimate the conditional joint evolution of temperature and CO2 at a millennial frequency. We document
three basic facts. First, the temperature–CO2 dynamics are non-linear, so that large deviations in either
temperature or CO2 concentrations take a long time to correct–on the scale of multiple millennia. Second,
the joint dynamics of temperature and CO2 concentrations exhibit multimodality around historical turning
points in temperature and concentration cycles, so that prior to the start of cooling periods, there is a
noticeable probability that temperature and CO2 concentrations may continue to increase. Finally,
evaluating the future evolution of temperature and CO2 concentration conditional on alternative scenarios
realizing, we document that, even conditional on the net-zero 2050 scenario, there remains a significant
risk of elevated temperatures for at least a further five millennia.

The Macroeconomic Effects of Climate Policy Uncertainty

Konstantinos Gavriilidis
,
University of Stirling
Diego Kaenzig
,
Northwestern University
James H. Stock
,
Harvard University

Abstract

Recent years have seen a lot of uncertainty about the future path of climate policy. How does this uncertainty affect the economy and the environment? In this paper, we construct a new measure of climate policy uncertainty based on newspaper coverage. Our index spikes near important events related to climate policy, such as major developments in emissions legislation, President’s statements about climate policy or global strikes about climate change, among other developments. We find that climate policy uncertainty has significant macroeconomic effects: increased uncertainty leads to a significant fall in industrial production and thus emissions and an increase in unemployment. Importantly, it also causes an increase in commodity and consumer prices. Thus, climate policy uncertainty shocks transmit to the economy as supply shocks. This stands in stark contrast to other uncertainty shocks, which have been found to propagate as aggregate demand shocks.

Optimal Climate Policy in a Global Economy

Anastasios Karantounias
,
University of Surrey

Abstract

This paper studies the optimal climate policy in a global economy. Emissions impose a dynamic, global, negative externality, raising natural questions about international policy coordination. To understand the issues involved, I first build a simple dynamic multi-country model and study the optimal cooperative climate policy that corrects the global externality. Moreover, I move beyond cooperation and study the optimal climate policy for a large country, that faces a passive rest of the world. In such a setup, incentives for corrective taxation are intertwined with interest rate manipulation. Implications for optimal carbon taxes and capital controls are drawn.

Discussant(s)
Noah Williams
,
University of Miami
Christian Matthes
,
Indiana University
Oscar Jorda
,
Federal Reserve Bank of San Francisco
Oleg Itskhoki
,
University of California-Los Angeles
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • Q5 - Environmental Economics