FT Climate Experts' Forum - 11 December

FT: Are derivatives and other financial instruments a good way to address the political issues around financing carbon reduction in developing countries? What are the risks and how can they be avoided? This refers not only to institutional proposals such as those offered by George Soros, but also market-based instruments

Julian Morris: Given that climate change is a long-term threat, it makes sense to use long-term credit markets to address it. So, for example, companies could issue zero-coupon contingent ‘climate change bonds’ which would pay out only if specific defined consequences were to materialise. The companies issuing these bonds would have incentives to prevent the consequences materialising - using the money raised from the bonds to pay for whatever is deemed to be the most cost-effective strategy. The bonds would trade in secondary markets, with prices varying according to the assessment by market participants of the probability of the consequences materialising. Plausibly, derivatives of the bonds might also be constructed. And the bond issuers might insure themselves against having to pay out, thereby transferring some or all of the risk of paying out - as well as the incentives to address the threat - to the insurer.