Sharing Of Climate Risks Across World Regions

Climate change impacts are stochastic and highly uncertain and moreover heterogeneous across regions. That is, there is a potential to sharing this risk ex-ante across regions and hence to reduce the welfare-economic costs of these risks. We analyze how climate risks could be reduced via an insurance scheme at the global scale across regions and quantify the potential welfare gains. We introduce risk sharing of global climate risk represented by the equilibrium climate sensitivity, and introduce an asset-based insurance scheme to allow for risk sharing across regions. We estimate that such risk sharing scheme could lead to welfare gains reducing the global costs of climate change by up to 15%. Such a scheme implies transfers of about USD 200 billion per year and faces important implementation challenges. The results provide a motivation for the loss and damage mechanism related negotiations about sharing risks of climate change at the global level.