Climate Damage Costs in South Korea’s Summer Season: The Role of Regional Temperature Heterogeneity
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This study estimates the damage costs of summer season climate change in South Korea using weather derivatives. Unlike previous studies that used national mean temperatures, it incorporates data from 10 regions to reflect heterogeneous temperature processes. A mean-reversion model is used to estimate temperature changes, and Monte Carlo simulations are run based on five climate scenarios. The results show that higher mean temperatures and increased volatility significantly raise the cost of CDD call options. Further, it reveals that the heterogenetic temperature movement in each region makes substantially different weather conditions in the future. Under the BAU scenario, damages are estimated at KRW 1.26–1.85 trillion, while active climate policies can reduce the damage to around KRW 0.6 trillion. The findings illustrate the importance of implementing aggressive carbon reduction policies to mitigate long-term energy sector losses resulting from climate change.
Abstract
This study estimates the damage costs of summer season climate change in South Korea using weather derivatives. Unlike previous studies that used national mean temperatures, it incorporates data from 10 regions to reflect heterogeneous temperature processes. A mean-reversion model is used to estimate temperature changes, and Monte Carlo simulations are run based on five climate scenarios. The results show that higher mean temperatures and increased volatility significantly raise the cost of CDD call options. Further, it reveals that the heterogenetic temperature movement in each region makes substantially different weather conditions in the future. Under the BAU scenario, damages are estimated at KRW 1.26–1.85 trillion, while active climate policies can reduce the damage to around KRW 0.6 trillion. The findings illustrate the importance of implementing aggressive carbon reduction policies to mitigate long-term energy sector losses resulting from climate change.