Document de travail

The cost-efficiency carbon pricing puzzle

Christian Gollier


Any global temperature target must be translated into an intertemporal carbon budget and its associated cost-efficient carbon price schedule. Under the Hotelling’s rule, the growth rate of this price should be equal to the interest rate. It is therefore a puzzle that cost-efficiency IAM models yield carbon prices that increase at an average real growth rate around 7% per year. This carbon pricing puzzle suggests that their abatement trajectories are not intertemporally optimized, probably because of the political unacceptability of a high initial carbon price. Using an intertemporal asset pricing approach, I examine the impact of the uncertainties surrounding economic growth and abatement technologies on the dynamics of eÿcient carbon prices, interest rates and risk premia. I show that marginal abatement costs and aggregate consumption are positively correlated along the optimal abatement path, implying a positive carbon risk premium and an eÿcient growth rate of expected carbon prices larger than the interest rate. From this numerical exercise, I recommend a growth rate of expected carbon price around 3.75% per year (plus inflation). I also show that the rigid carbon budget approach to cost-eÿciency carbon pricing implies a large uncertainty surrounding the future carbon prices that support this constraint. I show that green investors should be compensated for this risk by a large risk premium embedded in the growth rate of expected carbon prices, rather than by a collar on carbon prices as often recommended.


Carbon budget; Hotelling’s rule; consumption-based CAPM; climate finance.;

Codes JEL

  • D81: Criteria for Decision-Making under Risk and Uncertainty
  • G12: Asset Pricing • Trading Volume • Bond Interest Rates
  • Q54: Climate • Natural Disasters • Global Warming


Christian Gollier, « The cost-efficiency carbon pricing puzzle », TSE Working Paper, n° 18-952, septembre 2018, révision avril 2022.

Voir aussi

Publié dans

TSE Working Paper, n° 18-952, septembre 2018, révision avril 2022