Funding climate adaptation strategies with climate derivatives

Abstract

a b s t r a c tClimate 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. Crown

Managing living marine resources in a dynamic environment: The role of seasonal to decadal climate forecasts

“…For the aquaculture industry, multi-annual to decadal scale species distribution forecasts would improve capital investment decisions such as where to establish a new site, or estimate and sell risk in a market place (Little et al, 2015).…”

Risks, Resilience, and Natural Resource Management: Lessons From Selected Findings†

“…Using 12 GCM projections from 2010 to 2050 obtained from six different GCMs, with probabilities generated from three “best fit” autoregressive moving average (ARMA) models, Little et al. [] obtained an ensemble of 1200 downscaled projections of summer sea surface temperatures (SST) in a coastal area of Tasmania where salmon aquaculture is concentrated. A suitable bio‐physical trigger in terms of SST is 18 degrees Celsius because this is the upper thermal limit for successfully growing Atlantic salmon.…”

A new emission trading with bounded rational countries: a network game approach

“…Authors in Markandya et al [37] suggest a combination of historical responsibility and economic capacity (measured by GDP or per capita GDP) as indicators to allocate financing tasks. In addition, scholars have also considered raising green capital by other means, such as a carbon tax [2,3], climate-related derivatives markets [32], and transactions of carbon emission permissions [54].…”