Quantifying Climate Risk Premia

What are the quantifiable financial risks of climate change? We present a fully calibrated, literature-and policy-aligned framework linking a climate module with a workhorse asset-pricing model. It uniquely integrates transition risks tied to climate policy, physical risks reflecting persistent but not permanent impacts beyond adaptation, and the structural feedback from economic activity to temperature. Our framework yields closed-form solutions for time-varying risk-free rates, equity risk premia, and price-dividend ratios. In contrast to the existing long-run risks climate asset-pricing literature, we show that chronic climate risks generate positive risk premia, even without tipping points, increasing the equity risk premium by nearly 20% under 3°C of warming, which is sufficient to anticipate substantial market repricing.