Climate Extremes and Financial Crises: Similarities, Differences, and Interplay
- We aim to conceptualize the connection between climate extremes and financial crises by articulating their similarities, differences, and interplay from a complex system perspective.
- We argue that both are emergent disruptions to the normal functioning of their respective complex systems. Despite their differences in adaptivity, they share functional components and structural features, including nonlinear dynamics, contagion, feedbacks, phase transitions, and tipping points.
- We also observe epistemological resemblances between the two extremes in how they are studied, represented, and understood.
Assessing the Role of Insurance in Climate Policy: A DICE Model Framework Under Uncertainty
- This study quantitatively examines the role of insurance in climate policy under uncertainty.
- We introduce a public insurance component into the Dynamic Integrated Climate- Economy (DICE) model, representing an adaptation alternative to the mitigation policy.
- By explicitly modeling insurance payouts, premiums, and their effects on economic dynamics and mitigation incentives, we seek to quantify how insurance influences policy decisions, climate-economy trajectories, and the social cost of carbon (SCC).
Measuring Systemic Climate Risk
- Climate change poses a long-term threat to the financial sector that needs to be evaluated through stress testing. However, current scenarios often fail to reflect compound risk, where climate and market risks materialize simultaneously.
- We apply extreme value analysis to better capture the tail behaviour of these risks. We conduct empirical analysis for U.S. insurers, primarily using Climate Efficient Factor Mimicking Portfolio (CEP) as the climate risk factor. Five scenarios are designed to assess conditional expected losses from marginal and joint effects of climate and market stress.
- Isolating these risks leads to a significant underestimation of potential losses.
