Insurance as a Private Emissions Wedge

This paper examines an environmental insurance contract where a firm’s financial loss is endogenous, depending directly on its output and abate-ment decisions. In a three-stage game, a risk-averse monopolist chooses production, abatement, and insurance coverage, while the government pre-commits to an optimal emissions tax. Because financial losses increase with output, the insurance premium loading acts as a private emissions wedge. A higher loading factor raises the perceived marginal cost of dirty produc-tion, disciplining emissions by reducing output and encouraging abatement. Consequently, private risk pricing partially substitutes for public taxation, though this discipline stems from commercial insurance pricing rather than social marginal damage.