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Dirk Broeders
- 9 January 2025
- WORKING PAPER SERIES - No. 3011Details
- Abstract
- Climate-linked bonds, issued by governments and supranational organizations, are pivotal in advancing towards a net-zero economy. These bonds adjust their payoffs based on climate variables such as average temperature and greenhouse gas emissions, providing investors a hedge against long-term climate risks. They also signal government commitment to climate action and incentivize stronger policies. The price differential between climate-linked bonds and nominal bonds reflects market expectations of climate risks. This paper introduces a model of climate risk hedging and estimates that approximately three percent of government debt in major economies could be converted into climate-linked bonds.
- JEL Code
- E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G13 : Financial Economics→General Financial Markets→Contingent Pricing, Futures Pricing
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming