Estimating Financial Risks from the Energy Transition: Potential Impacts from Decarbonisation in the European Power Sector

64 Pages Posted: 9 Jul 2020

See all articles by Christopher Cormack

Christopher Cormack

Imperial College London; Quant Foundry Limited

Charles Donovan

Centre for Climate Finance & Investment, Imperial College Business School

Alex Koberle

Imperial College London

Anastasiya Ostrovnaya

Imperial College London; Centre for Climate Finance & Investment

Date Written: June 15, 2020

Abstract

Carbon reduction policies adopted by governments could have a significant impact on the profitability of companies. Anticipating these impacts is a growing concern for both investors and regulators. In this paper, we present an integrated assessment of energy transition risk that links future energy scenarios to a structural economic model. The methodology allows for a comprehensive evaluation of potential financial stresses on firms subject to binding emissions constraints. We pilot the methodology using electric utilities in the EU-28 as our sample. Our results show that aggressive climate mitigation policies affect both net profit margins and the required rate of capital expenditure. We present initial estimates of changes in equity returns and credit quality for these firms, as well as implications for future policy-making.

Keywords: climate change, transition risk, climate risk, corporate credit, credit risk

JEL Classification: Q54,C53

Suggested Citation

Cormack, Christopher and Donovan, Charles and Koberle, Alexandre and Ostrovnaya, Anastasiya, Estimating Financial Risks from the Energy Transition: Potential Impacts from Decarbonisation in the European Power Sector (June 15, 2020). Available at SSRN: https://ssrn.com/abstract=3598183 or http://dx.doi.org/10.2139/ssrn.3598183

Christopher Cormack (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Quant Foundry Limited ( email )

68 Lombard Street
LONDON, London, City of EC3V 9LJ
United Kingdom
EC3V 9LJ (Fax)

Charles Donovan

Centre for Climate Finance & Investment, Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Alexandre Koberle

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Anastasiya Ostrovnaya

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Climate Finance & Investment ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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