Mitigation reduces the expected future damages from climate change but how does it affect the aggregate risk borne by future generations? This raises the question of the ‘climate beta’, i.e., the elasticity of climate damages with respect to a change in aggregate consumption. In this paper we show that the climate beta is positive if the main source of uncertainty is exogenous, emissions-neutral technological progress, implying that mitigation has no hedging value. But these results are reversed if the main source of uncertainty is related to the carbon-climate-response and the damage intensity of warming. We then show that in the DICE integrated assessment model the climate beta is positive and close to unity. In estimating the social cost of carbon, this would justify using a relatively high rate to discount expected climate damages. However, the stream of undiscounted expected climate damages is also increasing in the climate beta. We show that this dominates the discounting effect, so that the social cost of carbon is in fact larger than when discounting expected damages at the risk-free rate. Joint with Christian Gollier and Louise Kessler.

Keywords: beta, climate change, discounting, integrated assessment, mitigation, risk, social cost of carbon