Betting on Global Warming : The Impact of Insurance Instruments on Mitigation of Climate Change

Since the 1980's the phenomenon of potential climate change or 'global warming' has been one of the predominant topics in environmental economics. Uncertainty is one of the main characteristics of climate change since many important scientific relationships are not yet well enough understood. Note that due to human activity, including abatement activity, climate uncertainty is endogenous uncertainty. Facing the uncertainty associated with global warming different types of response could be taken, as for example mitigation and insurance. This doctoral thesis focuses on the relation between the insurance and the mitigation approach. It studies the impact of insurance instruments on mitigation of climate change. The main characteristic of the financial instruments considered, called 'climate securities', is that their payoff depends on the future state of the climate, i.e. a set of climate-relevant data. Broadly speaking, buying or selling of such assets amounts to 'betting on the climate state.' A large part of the analysis is concerned, in particular, with the specific claim that financial instruments defined on the climate state can reduce free riding behaviour with respect to abatement of greenhouse gases. This claim originates from the Intergovernmental Panel on Climate Change's Second Assessment Report in 1995. However, there is no formal analysis of this claim in the literature. The impact of markets for climate securities is investigated within two different modelling frameworks. The first approach focuses on incomplete information with respect to countries' assessments of climate uncertainty whereas the second approach concentrates on endogenity of climate uncertainty. Uncertainty with respect to the climate state is common to both models.