The Adverse Impact of Gradual Temperature Change on Capital Investment
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abstract
Financial market information can provide an objective assessment of losses
anticipated from global warming. In a Merton-type asset pricing model,
with asset prices affected by perceived changes in investment
opportunities due to global warming, the risk premium is significantly
negative and growing over time, loadings for most assets are negative, and
asset portfolios in more vulnerable industries have stronger negative
loadings on the global warming factor. Average increases in required
returns attributed to global warming are 0.11 percent, implying a present
value loss of 4.18 percent of wealth. These costs complement previous
estimates of the cost of global warming.