A Finance Approach to Climate Stress Testing

Forthcoming in Journal of International Money and Finance

47 Pages Posted: 6 May 2020 Last revised: 13 Jan 2023

See all articles by Henk Jan Reinders

Henk Jan Reinders

Rotterdam School of Management; Dutch Central Bank (DNB)

Dirk Schoenmaker

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM); Centre for Economic Policy Research (CEPR)

Mathijs A. van Dijk

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2022

Abstract

There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box” macro-financial approach or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We develop a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of equity and debt instruments. We calibrate our model using detailed firm-level vulnerability data and apply the model to 2-digit sectoral exposures of Dutch banks. We find declines in the market value of banks’ assets of 3-14% of core capital for a €100 carbon tax shock, increasing to 9-32% for a €200 carbon tax shock.

Keywords: Climate stress test, contingent claims analysis, climate policies, carbon tax, banks

JEL Classification: G13, G21, H23, Q54

Suggested Citation

Reinders, Henk Jan and Schoenmaker, Dirk and van Dijk, Mathijs A., A Finance Approach to Climate Stress Testing (December 31, 2022). Forthcoming in Journal of International Money and Finance, Available at SSRN: https://ssrn.com/abstract=3573107 or http://dx.doi.org/10.2139/ssrn.3573107

Henk Jan Reinders

Rotterdam School of Management ( email )

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Dirk Schoenmaker (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam
Netherlands

HOME PAGE: http://www.rsm.nl/people/dirk-schoenmaker/

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,089
Abstract Views
2,816
Rank
30,536
PlumX Metrics