Climate Change and the Financial Industry
There are two aspects of climate change: mitigation and adaptation. Financial and insurance markets can play a critical role in both. The principal contribution the financial industry can have to mitigation is through cap-and-trade markets. These markets can reduce the growth of new emissions, they can encourage better mitigation strategies for countries, and they can bring innovations to the targeted industries that are not related to the emissions themselves. The insurance industry can contribute to both mitigation and to adaptation. Insurance and reinsurance companies take a long-term view of the types of risks associated with climate change, can measure those risks, and can create incentives for their clients to mitigate and adapt to those risks.
In this chapter, we first analyze how the lessons learned from SO2 markets in the US can be applied to CO2 markets. Then, we will discuss two CO2 markets—one compulsory and one voluntary. Finally, we will discuss the role of insurance and reinsurance markets in the context of adaptation and mitigation strategies for climate change.