Working Paper

The Rising Cost of Climate Change: Evidence from the Bond Market

Abstract: The level of the social discount rate (SDR) is a crucial factor for evaluating the costs of climate change. We demonstrate that the equilibrium or steady-state real interest rate is the fundamental anchor for market-based SDRs. Much recent research has pointed to a decrease in the equilibrium real interest rate since the 1990s. Using new estimates of this decline, we document a pronounced downward shift in the entire term structure of SDRs in recent decades. This lower new normal for interest rates and SDRs has substantially boosted the estimated economic loss from climate change and the social cost of carbon.

Keywords: social discount rate; cost of carbon; natural rate of interest; r-star;

JEL Classification: E43; E44; Q54; H43;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2020-07-07

Number: 2020-25

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