Towards a just transition insurance mechanism integrating climate risk, social protection, and green finance

Title : Towards a just transition insurance mechanism integrating climate risk, social protection, and green finance

Abstract:

The accelerating impacts of climate change expose workers worldwide to unprecedented socioeconomic risks. Extreme weather events—floods, wildfires, droughts, heatwaves, and storms—are no longer occasional shocks but recurring disruptions that erode job security, income stability, and occupational health. Current social insurance systems, largely designed for conventional economic cycles and individual contingencies, remain ill-equipped to address collective climate-induced risks. Against this backdrop, this article proposes a novel policy and financial architecture: a Just Transition Insurance System (JTIS) that combines disaster-related wage protection with green investment strategies, embedded within existing climate governance frameworks such as the EU Emissions Trading System (ETS).

1. Conceptual Foundation: Linking Just Transition and Climate Risk Insurance
The concept of a "just transition" has emerged as a normative principle in international climate law and labor governance, emphasizing the need to reconcile decarbonization with social justice. However, most policy approaches remain confined to employment reallocation and retraining schemes, neglecting the urgent reality of climate disasters that directly displace or incapacitate workers. By creating a dedicated insurance mechanism, the JTIS seeks to institutionalize solidarity among states, employers, and employees while mobilizing climate finance to buffer social vulnerability. In this model, climate-induced disasters are treated not merely as humanitarian emergencies but as structural labor risks requiring systemic insurance solutions.

2. Financing Architecture: Multi-Stakeholder Contributions

• The JTIS is financed through a hybrid model:

• State contributions reflect the social policy obligation to secure citizens against systemic risks.

• Employer contributions operationalize the principle of responsibility for occupational safety and continuity of employment.

• Employee contributions ensure minimum participation and strengthen solidarity within the system.

• ETS revenues provide the innovation: a portion of carbon pricing income is redirected to support disaster-related social protection, thus linking emissions responsibility with labor resilience.

• This diversified financing model mitigates fiscal asymmetry, embeds polluter-pays principles, and aligns with the broader EU framework for climate finance allocation.

3 Green Investment Nexus: Dual Social and Climate Benefits

• A distinguishing feature of the JTIS is its integration of green finance mechanisms. A share of collected premiums and ETS revenues would be invested in renewable energy, resilient infrastructure, and sustainable transport. These investments generate twofold outcomes:

• Social dividends: stable returns to sustain disaster payouts.

• Climate dividends: carbon credit generation through offset mechanisms, reinvested in adaptation and mitigation projects.

• By embedding insurance within the carbon economy, the JTIS transforms social protection into an instrument of ecological transition.

4. Role of Insurance and Reinsurance Companies
Insurance providers are not mere intermediaries but potential catalysts of sustainable finance. By channeling portions of their revenues into green projects, insurers can expand their role beyond risk transfer to risk transformation. Moreover, reinsurance mechanisms enable the diffusion of large-scale catastrophic risks across global capital markets. Reinsurers may employ green financial instruments—such as sustainability-linked bonds or transition funds—to stabilize their exposure. This expands the reach of the JTISF beyond domestic or regional boundaries, embedding climate solidarity into the global financial architecture.

5. Catastrophe Bonds and Alternative Risk Transfer

To supplement traditional insurance and reinsurance, the JTIS could issue catastrophe bonds (Cat Bonds), which securitize disaster risks by transferring them to capital market investors. If no disaster occurs, investors enjoy above-market returns; if disasters strike, proceeds are redirected to worker compensation. Importantly, this model can be adapted into Green Cat Bonds, where raised capital simultaneously finances adaptation projects. Furthermore, for jurisdictions adhering to Islamic finance principles, a sukuk-based model could replace conventional interest-bearing instruments. Here, investors share in project-generated profits rather than fixed coupon payments, while accepting reduced returns in disaster years as a form of social solidarity.

6. Beyond Compensation: Education and Transition Support

The JTIS should not be limited to post-disaster compensation. A portion of funds could be earmarked for worker retraining and green skill development, facilitating transitions into sustainable industries. This broadens the scope of the insurance from reactive protection to proactive capacity-building, aligning disaster resilience with long-term just transition goals. Workers not only receive income security during crises but also gain pathways into climate-resilient employment sectors.

7. Legal and Governance Implications
From a legal perspective, the JTIS necessitates a hybrid governance framework:

• International alignment: Consistency with International Labour Organization (ILO) just transition guidelines and the Paris Agreement’s climate finance commitments.

• Regional integration: Embedding within EU ETS governance to ensure predictability and enforceability.

• National implementation: Domestic legislation to formalize contributions, establish eligibility criteria, and regulate fund distribution.

• Such multi-level governance enhances legitimacy and avoids fragmentation across jurisdictions.

8. Expected Outcomes and Systemic Impact
The integrated JTIS model generates cascading benefits:

• Workers obtain disaster-related income guarantees and green re-employment opportunities.

• Employers reduce liabilities through risk-sharing while contributing to systemic resilience.

• Governments strengthen social cohesion and climate adaptation capacities.

• Insurers and reinsurers expand market opportunities via innovative green instruments.

• Society gains from synchronized social protection and ecological sustainability.

• This framework transcends the binary of climate mitigation vs. social justice by institutionalizing both within a single financial architecture.

Conclusion
The urgency of climate disruption requires reimagining social protection systems beyond their conventional boundaries. The Just Transition Insurance represents a transformative approach thorough integrating disaster-related wage protection with green finance, carbon markets, and innovative risk-transfer instruments. By aligning labor rights, financial innovation, and ecological imperatives, this model establishes a blueprint for climate-resilient welfare states. Far from being a mere insurance scheme, the JTIS embodies a new form of climate constitutionalism—anchoring workers’ rights within the architecture of global sustainability governance.