We develop a generic and transparent calibration strategy for simple climate models used in economics. The goal is to choose the free model parameters such as to best match the output of large-scale Earth System Models from the Coupled Model Intercomparison Project, run on pre-defined emissions scenarios. We propose to jointly use four different test cases that are considered pivotal in the climate science literature: two highly idealized tests to separately examine the carbon cycle and the temperature response, and two tests closer to real scenarios, incorporating gradual changes in CO2 emissions and exogenous forcings. To illustrate the applicability of our method, we re-calibrate the free parameters of the climate part of the seminal DICE-2016 model for three different CMIP5 model responses: the multi-model mean as well as two CMIP5 models that exhibit extreme but still permissible equilibrium climate sensitivities. As an additional novelty, our calibrations of DICE-2016 allow for an arbitrary time step in the model explicitly. By applying our comprehensive suite of tests, we i) confirm that both the temperature equations and the carbon cycle in DICE-2016 are miscalibrated and ii) we show that by re-calibrating coefficients all CMIP5 targets considered can be well matched. Finally, we apply the economic model from DICE-2016 in combination with the newly calibrated climate model to compute the social cost of carbon and optimal warming. We find the social cost of carbon to be similar to DICE-2016, while the optimal long-run temperature is almost one degree lower. The social cost of carbon turns out to be much less sensitive to the discount rate than in DICE-2016. We explain how the model's climate part relates to these differences. As the temperature in DICE-2016 under optimal mitigation falls outside the range of CMIP5 projections, we caution that one might want to be skeptical about policy advice based on DICE-2016.

Robert Mendelsohn of Yale School of the Environment, Department of Economics, and Yale School of Management reviews “Climate Future: Averting and Adapting to Climate Change” by Robert S. Pindyck. The Econlit abstract of this book begins: “Explores the extent and nature of the uncertainty of climate change's impact on the economy and society, promoting the argument that climate policy should focus on adaptation in preparation for the unlikelihood of sufficiently reducing greenhouse gas emissions.”

Climate finance is the study of local and global financing of public and private investment that seeks to support mitigation of and adaptation to climate change. In 2017, the Review of Financial Studies launched a competition among scholars to develop research proposals on the topic with the goal of publishing this special volume. We describe the competition, how the nine projects featured in this volume came to be published, and frame their findings within what we view as a broader climate finance research program.

With rising public attention to climate change, the proliferation of green mutual funds reflects expectations that they will contribute to a sustainable economic transition. This paper investigates the effects of climate news on mutual fund flows and portfolio allocation decisions. Using detailed flow- and holding-level data, we observe that heightened climate news results in significantly larger capital inflows into green funds than into their non-green counterparts. Furthermore, we show that, in response to climate news, green funds decrease their exposure to high-polluting firms relative to low-polluting firms more than non-green funds do. These results suggest that increasing public attention boosts capital reallocation towards green funds and that, in turn, potentially fosters investment relocation towards more environmentally friendly companies.

Do climate-oriented regulatory policies affect the flow of credit towards polluting firms? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms in relative terms. Specifically, euro area banks’ loan share to more polluting firms decreased by about 3percentage points compared to less polluting (or “green”) firms after the 2015 Paris Agreement (COP21). This result is stronger for banks that are well capitalized, have lower credit quality, and are less profitable.

This paper provides (for the nonspecialist) a highly streamlined discussion of the main issues, and controversies, in the design of climate mitigation policy. The first part of the paper discusses how much action to reduce greenhouse gas emissions at the global level is efficient under both the cost-effectiveness and welfare-maximizing paradigms. We then discuss various issues in the implementation of domestic emissions control policy, instrument choice, and incentives for technological innovation. Finally, we discuss alternative policy architectures at the international level.

We study the value impact of environmental shareholder proposals (ESPs) for Russell 3000 firms from 2006 to 2021. We distinguish between climate-dedicated ESPs and non-climate ESPs covering other environmental topics. We use two approaches to evaluate management's ability and willingness to select value-enhancing ESPs and reject value-destroying ESPs: (i) cumulative abnormal returns around the final proxy filing date and (ii) a regression discontinuity design around the voting threshold at the annual general meeting. Our results suggest that management has screening ability for ESPs, especially for climate proposals, and that investors and managers share common objectives in environmental activism.