Carbon leakage perspective: Unveiling policy dilemmas in emission trading and carbon tariffs under insurer green finance

This study delves into the intricacies of the policy dilemma surrounding carbon emission trading and carbon tariffs, with a specific focus on the perspective of carbon leakage. Using a capped call option model, we assess the equity of a life insurer, emphasizing the importance of carbon leakage resulting from borrowing by carbon-intensive manufacturers. The findings reveal a nuanced scenario: while an increase in green loans positively impacts the guaranteed rate of the insurer, it simultaneously poses a challenge to the equity of carbon-leakage vulnerable manufacturers. Stringent regulatory caps on emissions act as a limiting factor on guaranteed rates for carbon-intensive borrowers. Additionally, higher Carbon Border Adjustment Mechanism tariff rates contribute to a decrease in the guaranteed rate, affecting both the fund-providing insurer and the borrowing manufacturer. This analysis underscores the intricate balance required in policymaking and decision-making, where an understanding of these complex relationships becomes pivotal. Striking the right balance between environmental sustainability and financial stability is essential to navigating the policy dilemma inherent in carbon emission trading and carbon tariffs.