Climate

Moral hazards are ubiquitous. Green ones typically involve technological fixes: Environmentalists often see ‘technofixes’ as morally fraught because they absolve actors from taking more difficult steps toward systemic solutions. Carbon removal and especially solar geoengineering are only the latest example of such technologies. We here explore green moral hazards throughout American history. We argue that dismissing (solar) geoengineering on moral hazard grounds is often unproductive.

Climate change is beset with unpleasant surprises. Yields of maize (corn), wheat, rice and soya beans all fall precipitously when temperatures exceed certain thresholds — for example, 29 °C for maize. These four staple crops together account for 75% of the calories consumed by humans, so the non-linear temperature dependence of their yields calls for rapid action to avoid the tipping points, either by limiting the carbon dioxide emissions that are warming the planet or by relocating crop fields on a vast scale — probably both.

We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal and corporate bonds as well as in equity markets. We find that local exposure to damages related to heat stress equaling 1% of GDP is associated with municipal bond yield spreads that are higher by around 15 basis points per annum (bps), the effect being larger for longer-term, revenue-only and lower-rated bonds, and arising mainly from the expected increase in energy expenditures and decrease in labor productivity.

A climate catastrophe can be avoided, but only with a rapid and sustained investment in companies and projects that reduce greenhouse gas emissions. To the surprise of many, this has already begun. Investors are abandoning fossil-fuel companies and other polluting industries and financing businesses offering climate solutions. Rising risks, evolving social norms, government policies, and technological innovation are all accelerating this movement of capital.

Introduction for Special Issue in Honor of Martin Weitzman.

While no legislation is perfect, the US Inflation Reduction Act of 2022 will be a game changer for the transition to clean-energy sources, both in America and around the world. By doubling down on forward-looking industrial policy, the US is suddenly poised to give Europe, China, and others a run for their money.

Cutting carbon cuts "fossilflation" — and yes, that needs to be balanced against "greenflation." The Inflation Reduction Act tackles both, but getting the balance right will be key.

Should businesses worry about climate risk because doing so is good for their bottom line, or because their responsibilities ought to go beyond mere financial returns to shareholders? What if expanding one’s lens to include environmental, social, and corporate governance turns out to be good for business? What if not? These fundamental questions lie at the core of numerous ambitious efforts to align tools and resources of finance with global action to address climate change.

It is hard to look at a crisis like Russia’s invasion of Ukraine and see a moment of opportunity. We—to say nothing of Ukrainians—are still very much in a crisis, and a compounding one at that, with potential long-lasting economic and political consequences.