| By: |
Christian Gollier (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: |
Any global temperature target must be translated into an intertemporal carbon
budget and its associated cost-efficient carbon price schedule. Under the
Hotelling's rule without uncertainty, the growth rate of this price should be
equal to the interest rate. It is therefore a puzzle that many cost-efficiency
IAM models yield carbon prices that increase at an average real growth rate
above 7% per year, a very large return for traders of carbon assets. I explore
whether uncertainties surrounding the development of green technologies could
solve this puzzle. I show that future marginal abatement costs and aggregate
consumption are positively correlated. This justifies doing less for climate
change than in the safe case, implying a smaller initial carbon price, and an
expected growth rate of carbon price that is larger than the interest rate. In
the benchmark calibration of my model, I obtain an equilibrium interest rate
around 1% and an expected growth rate of carbon price around 3.5%, yielding an
optimal carbon price above 200 USD/tCO within the next few years. I also show
that the rigid carbon budget approach to cost-efficiency carbon pricing
implies a large uncertainty surrounding the future carbon prices that support
this constraint. I show that green investors should be compensated for this
risk by a large risk premium embedded in the growth rate of expected carbon
prices, rather than by a collar on carbon prices as often recommended. |
| Keywords: |
Carbon budget, Risk-adjusted Hotelling’s rule, Climate finance, Climate beta |
| Date: |
2024–11 |
| URL: |
https://d.repec.org/n?u=RePEc:hal:journl:hal-04938709 |