Global carbon pricing has been recognized as one of the most efficient mechanisms that can be used to reduce CO2 emissions. Many countries and firms alike are currently reviewing and/or implementing carbon pricing as a method to reduce their emissions, but questions remain about the magnitude of the price and the speed of implementation. Reports indicate significant variation in carbon prices across countries, while research is divided over what the global average carbon price should be in order to reach the Paris Climate Agreement goals to limit global warming to 1.5-2oC by 2100 relative to pre-industrial levels. We examine this important issue by extending the Dynamic Integrated Climate and Economy (DICE) model to estimate global carbon prices that will be required to reach various warming scenarios.

Similar to the conclusions of Cruz and Rossi-Hansberg (2022), our analysis suggests that while carbon pricing can play a critical role in reducing greenhouse gas emissions and limiting global warming, it must be supported by other policy measures and innovations in order to reach the Paris Agreement targets. In particular, we found there was no feasible carbon pricing scenario that was high enough to limit emissions sufficiently to achieve anything below 2.4oC warming on its own. Our findings indicate that a significant increase in the global average carbon price, which we estimate at $2.79 per tonne of CO2 emissions as of 2022, is necessary to achieve the target of 2.4oC by 2100.

We project significant differences in global physical costs due to climate change across various warming scenarios, which highlights the urgency of taking action to mitigate global warming. For example, our projected physical damages under a 2.4oC scenario is $331 trillion (t) by 2100, versus $479.9t under a 3oC scenario, and more than double the 2.4oC scenario figure at $764.6t under a 4.2oC scenario (which is the “zero carbon price” scenario). It is interesting to note that total damages even under the 2.4oC scenario at $331.18t are 25% higher than under the 2oC scenario ($264.69t) and are more than double (i.e., 118% higher) than under a 1.5oC scenario ($151.84t), which confirms the importance of hitting these important targets.

Air-pollution affects firms’ operating costs, reduces firms’ productivity, and future investment opportunities. Therefore, surprises in air-pollution level constitute an added risk factor to individual firms, which will be priced by rational investors. Using the Chinese data, we construct a simple measure of air-pollution risk for individual firms. Cross- sectional evidence suggests that differences in air-pollution betas are related to firms’ future fundamentals, including profit margins and investment. More important, future return differences of individual stocks can be explained by the differences in their air pollution betas, which is consistent with the pricing story of air-pollution risk. In addition, we present natural experiments to account for alternative channels and potential endogeneity issues. Different from the current research on the subject that adopts a behavioral approach, our study provides robust evidence on air-pollution as an independent risk factor that firms should care.

Using a novel loan-level identification of loans financing the environmental transition, we study non-bank lenders’ involvement in green lending. After the Paris Agreement, we find that syndicated corporate loans are more likely to be green loans (2%) if they include institutional loan tranches that cater to non-bank lenders. The effect is further amplified when non-bank lenders actively participate in the primary corporate lending market for such tranches, i.e., they join the syndication group at the loan origination stage. Robustness of the results are tested through a falsification test based on a placebo shock and through a reversed treatment test based on the US’s withdrawal from the Paris Agreement. The result is only partially explained by access to the securitization market by green corporate loans’ originators.