The Value at Risk from Climate Change

17 Pages Posted: 28 Oct 2015

See all articles by Howard Covington

Howard Covington

Cambridge University, Isaac Newton Institute for Mathematical Sciences

Date Written: October 27, 2015

Abstract

This paper develops earlier work on the impairment to the value of investment portfolios from global warming later this century. The growth in renewables and electric vehicles may be enough to strand fossil fuel assets from the late 2020s onwards, but will not alone bring emissions down fast enough to prevent high warming. A consequence is increasing systemic risk in investment portfolios. Using a probability-weighted family of climate damage functions it is estimated that the chance that future climate damage reaches one half of global gdp by 2100 is of the order of 3%. This outcome implies an equity portfolio value impairment of 10% currently, equivalent to $7 trillion in aggregate, increasing at 50 basis points a year. Development towards a high damage outcome of this kind could create a specific risk for the financial sector.

Keywords: Climate change, systemic risk, value at risk, fossil fuels, solar generation, wind generation, electric vehicles

JEL Classification: C53, G12, G20, G30, L71, Q41, Q42

Suggested Citation

Covington, Howard, The Value at Risk from Climate Change (October 27, 2015). Available at SSRN: https://ssrn.com/abstract=2681035 or http://dx.doi.org/10.2139/ssrn.2681035

Howard Covington (Contact Author)

Cambridge University, Isaac Newton Institute for Mathematical Sciences ( email )

Cambridge, CB3 9DD
United Kingdom

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