Price of climate risk hedging under uncertainty

Abstract In this manuscript, we examine the welfare benefits of climate risk hedges and the effects of climate uncertainty on optional portfolios with different investment horizons. We consider the case when an investor who trades in a stock market also holds a claim that pays off when an adverse climate scenario materializes. The optimal investoment strategy, the price of the claim, and the cost climate change uncertainty are derived. It is shown that climate uncertainty reduces stock investment. Furthermore, an increase in climate uncertainty decrease investor’s welfare, even when climate risk hedging instruments are available.