Climate-Linked Bonds

Dirk Broeders, Daniel Dimitrov and Niek Verhoeven

Working Papers from DNB

Abstract: Climate-linked bonds, issued by governments and supranational organizations, play a crucial role in achieving a net-zero economy. These bonds adjust their payoffs based on climate variables such as temperature and greenhouse gas levels, offering 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 and nominal bonds reflects market expectations of climate risks. This paper introduces a model of climate hedging and estimates that approximately three percent of government debt in major economies could be converted into climate-linked bonds.

Keywords: climate-linked bonds; climate risk; contingent claims; pricing green finance (search for similar items in EconPapers)
JEL-codes: E58 G12 G13 Q54 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-ene, nep-env and nep-fmk
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