The roles of weather insurance and the carbon market

Abstract

This chapter discusses two financial markets — the carbon and weather markets — and their potential role in helping stakeholders address climate change more effectively. While this chapter focuses on how these markets can benefit the poor in developing countries, it also examines the major constraints that must be addressed before the poor can gain access to carbon and weather markets. It also suggests how governments and donors might effectively facilitate sustainable carbon and weather market activity in developing countries. Poor households in developing countries are particularly vulnerable to weather shocks. To the extent that climate change may make such shocks more frequent, weather shocks and climate change are particularly troublesome given that proportionally more of the poor live in marginal areas and under marginal conditions. Furthermore, many of the world’s poor rely on rain-fed agriculture with limited ability to adapt to climate change (Corbera et al., 2006; Nicholls et al., 2007; Stern, 2006). What is not understood are the specific impacts climate change will have at subregional or local levels; therefore, planning for these future events remains a challenge for households, firms, and policy makers (IPCC [International Panel for Climate Change], 2007a; Lobell et al., 2008; Morton, 2007). Climate change projections depend on a variety of assumptions made by researchers regarding uncertain future weather patterns and feedback effects of reduced emissions (Hare and Meinhausen, 2006; Hulme et al., 2001; Stern, 2006; Yohe, 2006). This uncertainty challenges stakeholders trying to prioritize their efforts based on two overarching strategies for addressing climate change (IPCC, 2007a): mitigation to reduce anthropogenic contributions to climate change; and adaptation to adjust to the physical impacts of climate change. The authors argue that investments in adaptation are probably more critical for developing countries than investments in mitigation. This argument is based on the faster payoff of these investments relative to investments in mitigation.