Global warming and its importance are controversial. While a variety of estimates exists of the likelihood of global warming and its economic cost, financial market information can provide an objective assessment of expected losses due to global warming. We consider a Merton-type asset pricing model in which asset prices are affected by the changes in investment opportunities caused by global warming. In this setting, global warming would imply a negative risk premium, with most assets loading negatively on the global warming factor, and financial assets in sectors that are more sensitive to global warming exhibiting stronger negative loadings. Utilizing a variant of Campbell and Diebold's (2005) weather forecasting model in conjunction with Lamont's (2001) and Vassalou's (2003) approach for extracting financial market "news", we empirically uncover the global warming factor. We find that the risk premium is indeed significantly negative and becoming more so over time, that loadings for most assets are negative, and that asset portfolios in industries considered to be more vulnerable to global warming (see IPCC, 2007, and Quiggin and Horowitz, 2003) have significantly stronger negative loadings on the global warming factor. We estimate that required returns on average are 0.11 percentage points higher due to the global warming factor, translating to a present value loss of 4.18 percent of wealth. The industry loadings appear to be unrelated to potential vulnerability to emissions regulation. Rather, the loss in wealth represents a general cost from increased systematic risk due to uncertainty in the extent and impact of warming and the increased incidence of extreme weather events, thus complementing existing estimates of the cost of global warming
