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The Heat is on: a framework for measuring financial stress under disruptive energy transition scenarios

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Listed:
  • Robert Vermeulen
  • Edo Schets
  • Melanie Lohuis
  • Barbara Kölbl
  • David-Jan Jansen
  • Willem Heeringa

Abstract

This paper presents a comprehensive framework for analyzing financial stress under scenarios with a disruptive transition to a low-carbon economy. This stress testing framework is designed to be readily applied by macroprudential supervisors or financial institutions. First, we construct stress scenarios using two dimensions: climate policy and energy technology. Then, we rely on various modeling approaches to derive macroeconomic and industry-specific implications. These approaches include a novel methodology for capturing industry-specific transition risks. Third, we disaggregate EUR 2.3 trillion in assets of more than 80 Dutch financial institutions by industry. Finally, our calculations show that financial losses can be sizeable, as portfolio values can decline by up to 11%. These outcomes suggest that climate-transition risks warrant close and timely attention from a financial stability perspective.

Suggested Citation

  • Robert Vermeulen & Edo Schets & Melanie Lohuis & Barbara Kölbl & David-Jan Jansen & Willem Heeringa, 2019. "The Heat is on: a framework for measuring financial stress under disruptive energy transition scenarios," DNB Working Papers 625, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:625
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    References listed on IDEAS

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    Cited by:

    1. Palea, Vera & Drogo, Federico, 2020. "Carbon Emissions and the Cost of Debt Financing: What Role for Policy Commitment, Firm Disclosure and Corporate Governance?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202002, University of Turin.
    2. Patrick Bolton Patrick & Després Morgan & Pereira da Silva Luiz Awazu & Samama Frédéric & Svartzman Romain, 2020. "“Green Swans”: central banks in the age of climate-related risks [Le « Cygne Vert » : les banques centrales à l’ère des risques climatiques]," Bulletin de la Banque de France, Banque de France, issue 229.
    3. Gregor Semieniuk & Emanuele Campiglio & Jean‐Francois Mercure & Ulrich Volz & Neil R. Edwards, 2021. "Low‐carbon transition risks for finance," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 12(1), January.
    4. Julia Anna Bingler & Chiara Colesanti Senni, 2020. "Taming the Green Swan: How to improve climate-related financial risk assessments," CER-ETH Economics working paper series 20/340, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    5. Simon Dikau & Nick Robins & Matthias Täger, 2019. "Building a sustainable financial system: the state of practice and future priorities," Revista de Estabilidad Financiera, Banco de España;Revista de Estabilidad Financiera Homepage, issue Autumn.
    6. Vera Palea & Federico Drogo, 2020. "Carbon emissions and the cost of debt in the eurozone: The role of public policies, climate‐related disclosure and corporate governance," Business Strategy and the Environment, Wiley Blackwell, vol. 29(8), pages 2953-2972, December.

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    More about this item

    Keywords

    climate transition risk; uncertainty; stress test; financial stability;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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