What are “carbon price risk”?

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As per recent estimation by (World Bank 2017), 40 countries are involved in pricing schemes of carbon and emission trading, and the number is expected to increase due to the climate change agreement in Paris in 2015.

Political risk is a new form of phase from the current carbon price system where both companies and investors are involved. The risk is due to the emergence of the international climate agreement and national policies.

The carbon-related policies with certain time limits and to what period it can be extended determine when and which financial assets are affected. Risk is included with political as well as technological with uncertainty towards future possibility related to technologies which might affect speed and the transition scope in direction of the low-carbon economy.

This particular risk associated with carbon rice is acting as an influencer for many investors about the expectations of return related to the investment and provide a long-term commitment.

According to Dikau and Colz (2018), central banks also play an implicit and explicit role in financial and macroeconomic stability that can address risks associated with climate and environmental related issues.

As we know in the financial industry, central banks are powerful enough to support the development of green finance models, and thereby a considerate price for environmental and carbon risk can be enforced thereby promoting sustainable finance.

Source:- Handbook of Green finance by Jeffrey D. Sachs et al.

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