Financing the Climate Economy
9 Pages Posted: 11 Jul 2011
Date Written: June 27, 2011
According to the World Economic and Social Survey 2009, the review of available estimates of mitigation and adaptation costs suggests that additional annual total investments in developing countries could be upwards of $1 trillion per year. Given the limited ability of developing countries to finance domestic mitigation, it will require large scale financing from developed countries to allow developing countries to meet the costs of climate change. However, the global sovereign debt crisis is threatening an already fragile recovery, and the cost of extra debt could lead some countries to default. The problem is most acute in Europe, where the domestic considerations of each of the 17 partners in the euro zone routinely block progress on a final solution to keep Greece, Ireland, Portugal and some other peripheral members of the euro zone from going bankrupt. Although the scale of financing required to achieve mitigation and adaptation is high, studies such as the Stern Review 2006, and Parry et al. 2009 have demonstrated that the costs of inaction by far outweigh the costs of action. Hence, identifying new and additional sources of finance to support adaptation and the transition to low-carbon development in developing countries is a crucial component of addressing global climate change. The financial system being interconnected, we introduce climate derivatives by directly modeling the annual global mean temperature, which is the triggering variable in reducing greenhouse gas emissions worldwide, and we propose a financial mechanism that directly transfer climate risks from the product issuers to the long-term investors. Climate derivatives provide a hedge to protect governments and sea-front developers against financial disruption in the aftermath of adverse climate events. They can also be used to favour the growth and development of both developed and developing countries, instead of penalising them with extra debt accounting for uncertain climate change.
Keywords: Climate Change, Climate Risks, Climate Derivatives
Suggested Citation: Suggested Citation