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Climate change and credit risk: the effect of carbon taxes on Italian banks' business loan default rates

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  • Maria Alessia Aiello

    (Bank of Italy)

  • Cristina Angelico

    (Bank of Italy)

Abstract

Climate change poses severe systemic risks to the financial sector through multiple transmission channels. In this paper, we estimate the potential impact of different carbon taxes (€50, €100, €200 and €800 per ton of CO2) on the Italian banks’ default rates at the sector level in the short term using a counterfactual analysis. We build on the micro-founded climate stress test approach proposed by Faiella et al. (2021), which estimates the energy demand of Italian firms using granular data and simulates the effects of the alternative taxes on the share of financially vulnerable agents (and their debt). Credit risks stemming from introducing a carbon tax – during periods of low default rates – are modest on banks: on average, in a one-year horizon, the default rates of firms increase but remain below their historical averages. The effect is heterogeneous across different sectors and rises with the tax value; however, even assuming a tax of €800 per ton of CO2, the default rates are lower than the historical peaks.

Suggested Citation

  • Maria Alessia Aiello & Cristina Angelico, 2022. "Climate change and credit risk: the effect of carbon taxes on Italian banks' business loan default rates," Questioni di Economia e Finanza (Occasional Papers) 688, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_688_22
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    Cited by:

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    2. Bakkar, Yassine, 2023. "Climate Risk and Bank Capital Structure," QBS Working Paper Series 2023/04, Queen's University Belfast, Queen's Business School.
    3. Lee, Chien-Chiang & Wang, Chih-Wei & Hong, Pei-Hsuan & Lin, Weizheng, 2024. "Environmental policy stringency and bank risks: Does green economy matter?," International Review of Financial Analysis, Elsevier, vol. 91(C).
    4. Alexander Blasberg & Rüdiger Kiesel & Luca Taschini, 2022. "Carbon Default Swap - Disentangling the Exposure to Carbon Risk through CDS," CESifo Working Paper Series 10016, CESifo.
    5. Di Virgilio, Stefano & Faiella, Ivan & Mistretta, Alessandro & Narizzano, Simone, 2024. "Assessing credit risk sensitivity to climate and energy shocks: Towards a common minimum standards in line with the ECB climate agenda," Journal of Policy Modeling, Elsevier, vol. 46(3), pages 552-568.
    6. Liu, Zhonglu & Pang, Tengfei & Sun, Haibo, 2024. "Decarbonization policy and high-carbon enterprise default risk: Evidence from China," Economic Modelling, Elsevier, vol. 134(C).

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    More about this item

    Keywords

    climate change; carbon tax; climate stress test; banks’ credit risk;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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