Actuarial Seminar talk: Prof. Andrea Macrina (University of London)

Abstract: If the leading principle is that reducing carbon emissions today is more valuable than reducing emissions tomorrow, how should financial carbon discounting work? How should emissions abatement costs be linked to the cost of damages due to global warming in a discounting system? Starting from carbon budgets that limit global warming to under a specified level with a given probability, a carbon discount bond system is developed that depends on the stochastic carbon emissions and an associated emissions abatement plan. We show that the sooner and more capital is invested to reduce carbon emissions, the better. The proposed financial design and pricing approach also considers the notion of a carbon budget debt and its financial treatment in a tiered carbon discounting system. Hedge portfolios and carbon budget derivatives emerge that mitigate financial losses if emissions exceed a planned/mandated carbon budget.

Seminar organized by Prof. S. Arnold