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

Author(s): Michael D. Bauer and Glenn D. Rudebusch

Social discount rates (SDRs) are crucial for evaluating the costs of climate change. We show that the fundamental anchor for market-based SDRs is the equilibrium or steady-state real interest rate. Empirical interest rate models that allow for shifts in this equilibrium real rate find that it has declined notably since the 1990s, and this decline implies that the entire term structure of SDRs has shifted lower as well. Accounting for this new normal of persistently lower interest rates substantially boosts estimates of the social cost of carbon and supports a climate policy with stronger carbon mitigation strategies.

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Article Citation

Bauer, Michael D, and Glenn D. Rudebusch. 2021. "The Rising Cost of Climate Change: Evidence from the Bond Market," Federal Reserve Bank of San Francisco Working Paper 2020-25. Available at https://doi.org/10.24148/wp2020-25