Lars Peter Hansen

Pricing Uncertainty Induced by Climate Change (with William A. Brock)

In-principle acceptance of Review of Financial Studies Climate Finance registered report, completion in progress.

Abstract
Climate science documents uncertainty induced by alternative emission scenarios, uncertainty across alternative models, and it constructs simplified approximations to complex models. This paper asks if these components of uncertainty matter in an economic setting. To address this problem we pose a hypothetical social planning problem and embrace recent advances in decision theory designed to confront uncertainty, broadly conceived. We use ''shadow'' asset prices to assess the importance of climate uncertainty. The climate impacts depend on the horizon to the adverse outcomes might be realized. We use some recent data to assess some of the current impacts or impacts expected to be realized in the near term.