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Climate-Linked Bonds

Author

Listed:
  • Dirk Broeders
  • Daniel Dimitrov
  • Niek Verhoeven
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.

Suggested Citation

  • Dirk Broeders & Daniel Dimitrov & Niek Verhoeven, 2024. "Climate-Linked Bonds," Working Papers 817, DNB.
    • Handle: RePEc:dnb:dnbwpp:817
    as

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    File URL: https://www.dnb.nl/media/zo0ita3z/working_paper_no-817.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    climate-linked bonds; climate risk; contingent claims; pricing green finance;
    All these keywords.

    JEL classification:

    • 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 and their Management; Global Warming

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