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.”

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.

Global warming is the defining challenge of our times. An emerging literature is investigating the interactions between climate change and financial markets. Climate finance is studying the pricing of climate risks across asset classes and the ways to channel public and private capital towards climate mitigation and adaptation investments. In 2019, the Journal of Corporate Finance launched a call for papers on the finance of climate change with the goal of publishing a special volume. In this context, we discuss how finance can help to address climate challenges, the contribution of the papers selected for the Special Issue and what we view as a broader climate finance research program.

Quantitative estimates of the impacts of climate change on economic outcomes are important for public policy. We show that the vast majority of estimates fail to account for well-established uncertainty in future temperature and rainfall changes, leading to potentially misleading projections. We reexamine seven well-cited studies and show that accounting for climate uncertainty leads to a much larger range of projected climate impacts and a greater likelihood of worst-case outcomes, an important policy parameter. Incorporating climate uncertainty into future economic impact assessments will be critical for providing the best possible information on potential impacts.

We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk.