Christian Gollier, 06 April 2021

Any global temperature target must be translated into an intertemporal carbon budget and an associated cost-efficient carbon price schedule. This column uses an intertemporal asset-pricing approach to examine the impact of uncertainties surrounding economic growth and abatement technologies on the dynamics of efficient carbon prices. It finds evidence of a positive carbon risk premium and suggests an efficient growth rate of expected carbon prices of around 4% plus inflation. This is lower than the growth rates found in many public reports and integrated assessment models, and justifies a higher carbon price today in order to satisfy the carbon budget.

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