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 carbonintensive 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.
