The E-axes Forum on Climate Change, Macroeconomics, and Finance

Jean-Paul Renne

“Climate Linkers: Rationale and Pricing”

Event description

Jean-Paul Renne will present findings from his recent paper (with Pauline Chikani), “Climate Linkers: Rationale and Pricing”

From the abstract:

This paper envisions climate linkers. We define climate linkers as long-dated financial instruments (bonds, swaps, and options) with payoffs indexed to climate-related variables, e.g., temperatures, sea levels, or carbon concentrations. On top of facilitating the sharing of long-term climate risks, another key benefit of these instruments would be informational, as their prices would reveal real-time market expectations regarding future climate. We develop and calibrate a sea-level-augmented integrated assessment model (IAM), and we exploit it to study climate-linked instruments’ cost and risk characteristics. We examine, in particular, climate risk premiums: because of the insurance provided by a bond indexed on sea levels (say), investors would demand a lower average return on such a bond than on conventional bonds.
Our findings highlight the sensitivity of climate premiums to the assumptions regarding (i) the damages associated with temperature increases and (ii) feedback effects between temperatures and carbon emissions.

Moderator:

Anastasia Pappas
Founder, E-axes Forum

Jean-Paul Renne

Jean-Paul Renne is a professor of economics at HEC Lausanne, which he joined in 2015. Previously, he worked as a senior economist at the Banque de France and as the head of operational research at the French debt management office (French Treasury). Jean-Paul Renne holds a Ph.D. in Applied Mathematics from Paris-Dauphine University. He has graduated from the Ecole Polytechnique de Paris and Ecole Nationale des Ponts et Chaussées (ENPC), and also holds a Master degree in Public Actions from the ENPC. His research focuses on time series modeling, with applications to the dynamics of interest rates, the pricing of disaster risk, and public debt management. He has published articles in the Review of Economic Studies, the Journal of Econometrics, Management Science, and the Review of Finance.

Paper and slides

Climate Linkers: Rationale and Pricing (Paper)

Climate Linkers: Rationale and Pricing (Slides)

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