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Model-based financial regulations impair the transition to net-zero carbon emissions

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Listed:
  • Matteo Gasparini

    (University of Oxford
    University of Oxford)

  • Matthew C. Ives

    (University of Oxford
    University of Oxford)

  • Ben Carr

    (London School of Economics
    Enterprise Products)

  • Sophie Fry

    (University of Oxford)

  • Eric Beinhocker

    (University of Oxford
    University of Oxford)

Abstract

Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments.

Suggested Citation

  • Matteo Gasparini & Matthew C. Ives & Ben Carr & Sophie Fry & Eric Beinhocker, 2024. "Model-based financial regulations impair the transition to net-zero carbon emissions," Nature Climate Change, Nature, vol. 14(5), pages 476-481, May.
    • Handle: RePEc:nat:natcli:v:14:y:2024:i:5:d:10.1038_s41558-024-01972-w
    DOI: 10.1038/s41558-024-01972-w
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