Euro Area Banks' Sensitivity to Changes in Carbon Price

43 Pages Posted: 12 Mar 2022

See all articles by Marco Belloni

Marco Belloni

European Union - European Investment Bank

Friderike Kuik

European Central Bank (ECB)

Luca Mingarelli

European Central Bank (ECB)

Date Written: March, 2022

Abstract

In recent years there has been growing attention on the risks posed by climate change. One relevant question for financial stability is to which extent the materialisation of transition risks emerging from the sudden implementation of climate change mitigation policies would impact the financial system. In this paper we analyze the effects of changes in carbon price on the European banking system. We assess this climate change transition risk through a banking sector contagion model where firms are negatively impacted by an increase in carbon prices. Using a unique granular dataset we evaluate the consequences of a combination of different increases in carbon prices and firm emission reduction strategies. We find that taking early policy action, implying more gradual changes in carbon prices, is not expected to lead to adverse impacts on the banking system, especially if firms reduce their emissions efficiently. Conversely, a disorderly, abrupt transition to a low carbon economy requiring very high sudden changes in carbon prices might have disruptive effects on the financial system, especially if firms fail to reduce their emissions.

Keywords: climate change, empirical banking, financial networks, transition risk

JEL Classification: Q48, Q54, Q58

Suggested Citation

Belloni, Marco and Kuik, Friderike and Mingarelli, Luca, Euro Area Banks' Sensitivity to Changes in Carbon Price (March, 2022). ECB Working Paper No. 2022/2654, Available at SSRN: https://ssrn.com/abstract=4055750 or http://dx.doi.org/10.2139/ssrn.4055750

Marco Belloni (Contact Author)

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

Friderike Kuik

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Luca Mingarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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