The Heat Is on: A Framework for Measuring Financial Stress Under Disruptive Energy Transition Scenarios

41 Pages Posted: 5 Mar 2019

See all articles by Robert Vermeulen

Robert Vermeulen

De Nederlandsche Bank

Edo Schets

De Nederlandsche Bank

Melanie Lohuis

De Nederlandsche Bank

Barbara Kölbl

De Nederlandsche Bank

David-Jan Jansen

De Nederlandsche Bank ; Vrije Universiteit Amsterdam, School of Business and Economics

Willem Heeringa

De Nederlandsche Bank

Date Written: February 25, 2019

Abstract

This paper presents a comprehensive framework for analyzing financial stress under scenarios with a disruptive transition to a low-carbon economy. This stress testing framework is designed to be readily applied by macroprudential supervisors or financial institutions. First, we construct stress scenarios using two dimensions: climate policy and energy technology. Then, we rely on various modeling approaches to derive macroeconomic and industry-specific implications. These approaches include a novel methodology for capturing industry-specific transition risks. Third, we disaggregate EUR 2.3 trillion in assets of more than 80 Dutch financial institutions by industry. Finally, our calculations show that financial losses can be sizeable, as portfolio values can decline by up to 11%. These outcomes suggest that climate-transition risks warrant close and timely attention from a financial stability perspective.

Keywords: climate transition risk, uncertainty, stress test, financial stability

JEL Classification: G20, Q43, Q54

Suggested Citation

Vermeulen, Robert and Schets, Edo and Lohuis, Melanie and Kölbl, Barbara and Jansen, David-Jan and Heeringa, Willem, The Heat Is on: A Framework for Measuring Financial Stress Under Disruptive Energy Transition Scenarios (February 25, 2019). De Nederlandsche Bank Working Paper No. 625 (2019), Available at SSRN: https://ssrn.com/abstract=3346466 or http://dx.doi.org/10.2139/ssrn.3346466

Robert Vermeulen (Contact Author)

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Edo Schets

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Melanie Lohuis

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Barbara Kölbl

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

David-Jan Jansen

De Nederlandsche Bank ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

HOME PAGE: http://sites.google.com/site/djansenresearch

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Willem Heeringa

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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