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Assessing insurer green finance in response to manufacturing carbon emissions trading in a dragon-king environment: A capped barrier cap option approach

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  • Li, Xuelian
  • Lu, Tinghui
  • Lin, Jyh-Horng
  • Lai, Yingkuan

Abstract

It is essential to examine how carbon trading affects the financial performance of life insurers who offer funding in a challenging dragon-king environment. The primary focus of this study is to evaluate the effects of manufacturing-borrower carbon emissions trading on the insurer's interest margin and insurance stability. To this end, a capped barrier cap option model is developed to capture the manufacturing borrower credit risk from green operations, the quality of the dragon-king environment, and the insurer's equity valuation through liquidity management with life insurance policy loans. The findings of this study indicate that stricter regulatory caps increase insurer interest margins but hurt insurance stability. Additionally, green improvements help increase interest margins but create greater insurance instability. The increase in carbon allowances purchased by the carbon-intensive borrower for production permission increases the insurer's interest margins but reduces insurance instability. These energy policies create insurer profitability and financial instability, causing regulators to reconsider their energy policies from the perspective of fund providers. Our study contributes to the green literature by considering that manufacturing borrower cap-and-trade participation affects insurer performance in a dragon-king environment. The results of this study can inform policymakers and insurers in developing effective carbon trading strategies to balance profitability and stability in challenging environments.

Suggested Citation

  • Li, Xuelian & Lu, Tinghui & Lin, Jyh-Horng & Lai, Yingkuan, 2023. "Assessing insurer green finance in response to manufacturing carbon emissions trading in a dragon-king environment: A capped barrier cap option approach," Energy Economics, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:eneeco:v:128:y:2023:i:c:s0140988323006795
    DOI: 10.1016/j.eneco.2023.107181
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    More about this item

    Keywords

    Cap-and-trade; Capped barrier cap option; Dragon king; Green finance;
    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
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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