Pricing Climate Risks of Energy Investments: A Comparative Case Study

In, Soh Young; Manav, Berk; Venereau, Clothilde M.A.; Rodriguez, Luis; Weyant, John P.

doi:10.2139/ssrn.3779228

Cited by 3 publications

(3 citation statements)

References 51 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Such micro-level understanding is important to enable the financial sector to unlock the billions in adaptation investment needed to mitigate climate change (Dodman 2009;Fankhauser 2010;Hughes et al 2010;Narain et al 2016). In et al (2021) and Luo et al (2023), for instance, initiated such work on the micro-level implications of climate risk for electricity generation infrastructure.…”

Section: Motivations and Research Questionsmentioning

confidence: 99%

See 1 more Smart Citation

Theoretical Foundation for Pricing Climate-Related Loss and Damage in Infrastructure Financing

Assab

2024

JRFM

View full text Add to dashboard Cite

This paper presents a novel theoretical framework for incorporating climate risks and adaptation investments into infrastructure debt pricing. Utilizing the Capital Asset Pricing Model (CAPM), the framework extends the conventional modeling of infrastructure project revenues and costs to include climate risk considerations. It proposes three climate-informed revenue and cost formulations: adjustmentment of mean and standard deviation, incorporation of extreme climate events via Pareto and Poisson distributions, and a climate-informed cost model that includes adaptation investment. The paper demonstrates the application of this model in pricing a loan for a Light Rail Transit project in Costa Rica, introducing the concepts of “flood risk premium” and “adaptation curves”. This study not only offers a novel lens through which to view infrastructure investment under climate uncertainty but also sets the stage for transformative policy and practice in financial risk assessment, encouraging a shift towards more sustainable and resilient infrastructure development.

show abstract

Section: Motivations and Research Questionsmentioning

confidence: 99%

“…Both (In et al 2021) and (Luo et al 2023) clarify the mechanisms through which physical climate risks can reduce revenues for energy generation projects. In et al (2021) show that these risks can have an impact on financial performance through increases in costs due to damages from extreme events.…”

Section: Motivations and Research Questionsmentioning

confidence: 99%

Theoretical Foundation for Pricing Climate-Related Loss and Damage in Infrastructure Financing

Assab

2024

JRFM

View full text Add to dashboard Cite

show abstract

“…Negative carbon premia (Choi et al., 2018; Hentati‐Kaffel & Ravina, 2020; Ravina, 2022) are especially difficult to interpret since they do not relate to any of the above hypotheses. One possibility is that investors hold high‐carbon assets to hedge against policy inconsistency (In et al., 2021). Another interpretation (Choi et al., 2018) relates to perceptions of fewer investment opportunities in transition‐exposed sectors.…”

Section: Financiers and Transition Risksmentioning

confidence: 99%

Financial stability, stranded assets and the low‐carbon transition – A critical review of the theoretical and applied literatures

Daumas

2023

Journal of Economic Surveys

View full text Add to dashboard Cite

Transitioning to a low‐carbon economy will entail sweeping transformations of energy and economic systems. A growing research body has raised concerns about the effect of such strain on financial stability. This literature on “financial transition risk” has highlighted that the conjunction of climate policy, technological change and shifts in consumption patterns may propagate to financial markets. In extreme cases, these dynamics may result in a “Climate‐Minsky” moment with systemic implications. The field has developed quickly, covering many methods and research questions. While this expansion in literature is advantageous when studying a complex issue like the low‐carbon transition, it also comes with downsides. The large number of methods hampers result comparison, and the integration of research designs. It also makes it difficult to provide a synthetic view of results in the literature as well as identify remaining uncertainties. To bridge these gaps, I propose a critical review of the literature. I examine three sub‐fields: the asset stranding literature, the direct assessment of transition risks through prospective models and the financial empirics of the low‐carbon transition. I expound their main results, critically assess underlying methodologies and propose a framework to compare results. The review ends by suggesting some avenues for future research.

show abstract