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Funding climate adaptation strategies with climate derivatives

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journal contribution
posted on 2023-05-19, 07:59 authored by Richard Little, Hobday, AJ, Parslow, J, Davies, CR, Grafton, RQ
Climate adaptation requires large capital investments that could be provided not only by traditional sources like governments and banks, but also by derivatives markets. Such markets would allow two parties with different tolerances and expectations about climate risks to transact for their mutual benefit and, in so doing, finance climate adaptation. Here we calculate the price of a derivative called a European put option, based on future sea surface temperature (SST) in Tasmania, Australia, with an 18 °C strike threshold. This price represents a quantifiable indicator of climate risk, and forms the basis for aquaculture industries exposed to the risk of higher SST to finance adaptation strategies through the sale of derivative contracts. Such contracts provide a real incentive to parties with different climate outlooks, or risk exposure to take a market assessment of climate change.

History

Publication title

Climate Risk Management

Volume

8

Pagination

9-15

ISSN

2212-0963

Department/School

Institute for Marine and Antarctic Studies

Publisher

Elsevier Science BV

Place of publication

United States

Rights statement

Crown Copyright 2015. Licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) https://creativecommons.org/licenses/by/4.0/

Repository Status

  • Open

Socio-economic Objectives

Climate change adaptation measures (excl. ecosystem)

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