Measuring Climate Transition Risk at the Regional Level with an Application to Community Banks

60 Pages Posted: 24 Mar 2025

See all articles by Mitchell Berlin

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department

Sung Je Byun

Federal Reserve Bank of Dallas - Banking Supervision

Pablo D'Erasmo

Federal Reserve Bank of Philadelphia - Research Department

Edison G. Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: March, 2025

Abstract

We develop a measure of climate transition risk for regional economies in the U.S., based on the mix of firms that produce emissions in each region. To quantify transition risks, we consider the introduction of an emissions tax levied on companies emitting greenhouse gases and estimate changes in the market values of industries due to a carbon tax using Merton’s (1974) model. We find that transition risks are highly concentrated in a few sectors and counties with heavy exposures to transition-sensitive sectors. The size and geographic concentration of the tax effects depend significantly on assumptions about the elasticity of demand for inputs in the production chain. When applying county-level estimates for transition risks to banks’ deposit footprint, we find mild to moderate transition risks for community banks as a whole, although transition risks are high for a few banks.

Keywords: Greenhouse Gas Emissions, Transition Risk, Carbon Taxes, Regional Transition Risks, Bank Exposure

JEL Classification: R11, R15, Q21, Q51, Q54, C53

Suggested Citation

Berlin, Mitchell and Byun, Sung Je and D'Erasmo, Pablo and Yu, Edison G., Measuring Climate Transition Risk at the Regional Level with an Application to Community Banks (March, 2025). FRB of Philadelphia Working Paper No. 25-11, Available at SSRN: https://ssrn.com/abstract=5188948 or http://dx.doi.org/10.21799/frbp.wp.2025.11

Mitchell Berlin (Contact Author)

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
215-574-3822 (Phone)
215-574-4364 (Fax)

Sung Je Byun

Federal Reserve Bank of Dallas - Banking Supervision ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5660 (Phone)

HOME PAGE: http://https://sites.google.com/site/sungjebyun/

Pablo D'Erasmo

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Edison G. Yu

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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