Climate Risks, Bailouts and Moral Hazard
Abstract:
Climate-related risks in the form of transition risk and physical risk have become a first-order issue for companies and their investors to monitor and manage. However, under certain circumstances, they might successfully avoid bearing the consequences associated with those risks. Thanks to their ‘too important to fail’ status, international investor protections or domestic agreements, governmental bailout in both types of risks is a real possibility. Expectations of an ex post bailout in the case of materialisation of climate-related risks may lead however to moral hazard ex ante, creating an adaptation and transition gap in the real economy. Therefore, this article argues that policymakers need to reduce or eliminate moral hazard in this context via certain tools and further discusses regulatory and governance implications.