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Climate-linked bonds

Author

Listed:
  • Broeders, Dirk
  • Dimitrov, Daniel
  • Verhoeven, Niek

Abstract

Climate-linked bonds, issued by governments and supranational organizations, are pivotal in advancing towards a net-zero economy. These bonds adjust their payoffs based on climate variables such as average temperature and greenhouse gas emissions, providing investors a hedge against long-term climate risks. They also signal government commitment to climate action and incentivize stronger policies. The price differential between climate-linked bonds and nominal bonds reflects market expectations of climate risks. This paper introduces a model of climate risk hedging and estimates that approximately three percent of government debt in major economies could be converted into climate-linked bonds. JEL Classification: E58, G12, G13, Q54

Suggested Citation

  • Broeders, Dirk & Dimitrov, Daniel & Verhoeven, Niek, 2025. "Climate-linked bonds," Working Paper Series 3011, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253011
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3011~80c0574c0d.en.pdf
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    More about this item

    Keywords

    asset pricing; climate-linked bonds; climate risk; contingent claims; green finance;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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