Greening (Runnable) Brown Assets with a Liquidity Backstop

Abstract

The momentum toward greening the economy implies transition risks that are new threats to financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. We show that runs can be contained by a liquidity backstop with an access fee that depends on the firm’s carbon intensity, while the interest rate on the liquidity lent through this facility is independent from its carbon intensity.

Keywords: Financial stability, Runs, Brown assets, Liquidity provision

JEL Classification: G01, G18, G28