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Free riding and insurer carbon-linked investment

Author

Listed:
  • Huang, Fu-Wei
  • Chen, Shi
  • Lin, Jyh-Horng

Abstract

The paper develops a two-insurer contingent claim framework to evaluate their equities. One insurer conducts carbon-linked investment, while the other conducts conventional (non-carbon-linked) investment. The free-riding issue becomes essential because of the carbon-emission externality. We show that the life insurance policyholders are free riders when either the return of carbon-linked or the conventional investment increases. But the cost burden of policyholder protection is the reduced insurer interest margin. The results also apply to the increased carbon-linked investment volatility and the different coronavirus COVID-19 impacts on the two-insurer interest margins. In the soundness test, we show that insurance stability at the cost of insurer profits is less significant when the carbon-linked investor's barrier increases. Free riding would be intimately relevant to insurance and carbon-emission environments in the barrier option model.

Suggested Citation

  • Huang, Fu-Wei & Chen, Shi & Lin, Jyh-Horng, 2022. "Free riding and insurer carbon-linked investment," Energy Economics, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:eneeco:v:107:y:2022:i:c:s0140988322000263
    DOI: 10.1016/j.eneco.2022.105838
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    Cited by:

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    More about this item

    Keywords

    Free riding; Carbon-linked investment; Carbon emission; Insurer interest margin; Policyholder;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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