Pricing greenhouse gas emissions is a risk management problem involving making trade-offs between consumption today and unknown and potentially catastrophic damages in the (distant) future. The optimal price is necessarily based on society’s willingness to substitute consumption across time and across uncertain states of nature. A large body of work in macroeconomics and finance attempts to infer societal preferences using the observed behavior of asset prices, concluding that the standard preference specifications are inconsistent with observed asset valuations. This literature has developed a richer set of preferences that are more consistent with asset price behavior. We will explore the implications of these richer preference specifications for the optimal pricing of carbon emissions.
Bob Litterman is a founding partner of Kepos Capital. He also enjoyed a 23-year career at Goldman Sachs. He is the co-developer of the Black-Litterman Global Asset Allocation Model, a key tool in investment management, and has co-authored many books. Bob earned a Ph.D. in Economics from the University of Minnesota. He has been the recipient of many honors: Risk Manager of the Year by the Global Association of Risk Professionals. Inaugural recipient of the S. Donald Sussman Fellowship at MIT's Sloan School of Management, CFA Institute's Nicholas Molodovsky Award and the the International Association of Quantitative Finance/SunGard Financial Engineer of the Year Award. Bob serves on a number of boards, including Commonfund, Options Clearing Corporation, Resources for the Future, Robert Wood Johnson Foundation, the Sloan Foundation and World Wildlife Fund.
Presentation video - Pricing Climate Change