AEA Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model
AEA Papers and Proceedings
(pp. 517–521)
Abstract
We study the impact of climate policy on the long-run real interest rate in a neoclassical growth model. A carbon price reduces the long-run rate only if it grows faster than at least one fossil fuel price. Consider a carbon price that grows at 5 percent per year. This tax reduces the long-run rate by 25 basis points if fossil fuel prices grow at their historical rates and by 77 basis points if they are constant. A carbon price that implements the least-cost path to net zero reduces the long-run rate by up to 54 basis points.Citation
Casey, Gregory, Stephie Fried, and William B. Peterman. 2026. "Climate Policy and the Long-Run Interest Rate: Insights from a Simple Growth Model." AEA Papers and Proceedings 116: 517–521. DOI: 10.1257/pandp.20261026Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- O41 One, Two, and Multisector Growth Models
- Q35 Hydrocarbon Resources
- Q54 Climate; Natural Disasters and Their Management; Global Warming