Carbon Tax Sectoral (CATS) Model: A Sectoral Model for Energy Transition Stress Test Scenarios

53 Pages Posted: 19 Sep 2022

Date Written: September 16, 2022

Abstract

This paper presents a general equilibrium sectoral model designed to produce macroeconomic scenarios that incorporate transition risks associated with policies to curb climate change (but not physical risks associated with the long-term costs of climate change). The model is calibrated to the Spanish economy, and can simulate the impact of shocks to the price and coverage of greenhouse gas emission allowances, with particular attention to sectoral asymmetries arising from (i) the energy intensity of each industry, (ii) the source of that energy, and (iii) the interdependencies with other industries. We show that for an increase in the price of emission allowances similar to that observed in recent years (from approximately €25 per tonne of CO2 in 2019 to almost €100 per tonne in 2022) the model predicts a cumulative decline in Spanish GDP after three years of 0.37%. The loss in value added is very heterogeneous across industries, ranging from 4% in the most severely affected industries to virtually no impact in the least affected industries. In terms of the use of the model for stress testing, this heterogeneity points to potential risks for financial stability and the importance of the right diversification for banks to diminish their exposure to transition risks.

Keywords: climate change, stress test, input-output matrix

JEL Classification: Q48, H30

Suggested Citation

Aguilar, Pablo and González, Beatriz and Hurtado, Samuel, Carbon Tax Sectoral (CATS) Model: A Sectoral Model for Energy Transition Stress Test Scenarios (September 16, 2022). Banco de Espana Occasional Paper 2218, Available at SSRN: https://ssrn.com/abstract=4220484

Pablo Aguilar (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Beatriz González

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Samuel Hurtado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
51
Abstract Views
181
Rank
693,387
PlumX Metrics