Climate-linked bonds

Dirk Broeders, Daniel Dimitrov and Niek Verhoeven

No 3011, Working Paper Series from European Central Bank

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 Classification: E58, G12, G13, Q54

Keywords: asset pricing; climate-linked bonds; climate risk; contingent claims; green finance (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-ene and nep-env
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253011

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