Climate Change and Long-Run Discount Rates: Evidence from Real Estate

We show that housing markets provide information about the appropriate discount rates for valuing investments in climate change abatement. Real estate is exposed to both consumption and climate risk and its term structure of discount rates is downward sloping, reaching 2.6% for payoffs beyond 100 years. We use a tractable asset pricing model that incorporates features of climate change to show that the term structure of discount rates for climate-hedging investments is thus upward sloping but bounded above by the risk-free rate. At horizons at which risk-free rates are unavailable, the estimated housing discount rates provide an upper bound.

Automated summary

The study shows that housing markets can provide valuable information about appropriate discount rates for investments in climate change abatement. While the term structure of discount rates for real estate is downward sloping, it is upward sloping for climate-hedging investments, with an upper limit set by the risk-free rate. Housing discount rates can serve as an upper bound for valuing investments in the absence of risk-free rates.