Climate-contingent finance

Reducing greenhouse gas emissions is a global collective action problem. Climate adaptation (reducing vulnerability to future climate change) more of local planning and financing problem, with fewer generalizable solutions. Although could yield significant benefits under scenarios cities will be spending trillions on infrastructure, the uncertainty those decreases feasibility proactively adapting, especially where political consensus required (which case for most infrastructure). However, projects underwritten by paid in they’re designed address because other entities would like hedge financial risk support resilience. For instance, infrastructure can built defend against extreme change through upfront spending. In doing so, owners implicitly buying out-of-the-money options change. These expenditures generate resilience benefit climate. Because return investment many actions function level change, it's optimal adapting entity finance repayment also It's downside serve as an investing counter-party they obtain higher than market rates when need it most. In this way, communities, states reduce over-prepare their investors under-prepare. This superior typical insurance climate-contingent mechanisms are not merely financially hedging but outright helping prevent physical damage, therefore creating value. Instead insurance, paying defense. Both sides positive-sum relationship — hedgers made better off. coordinates capital time according parties’ reduction capabilities profiles, while providing diversifying investors. Currently, governments, asset managers, companies, farmers important components economy (e.g., commodities prices, credit risks, interest rates) dollars derivatives investments contracts – we propose provide similar type capability context. Municipalities raise debt that flow climate-aware real projects. paper, describe investigate specifics how instruments work simulation experiments optimization analyses. Finally, outline policy proposal catalyze investment.