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Low-carbon transition risks for finance

Author

Listed:
  • Gregor Semieniuk

    (Political Economy Resaerch Institute and Department of Economics, University of Massachusetts Amherst)

  • Emanuele Campiglio

    (Institute of Ecological Economics, Vienna University of Economics and Business)

  • Jean-Francois Mercure

    (Department of Geography, University of Exeter)

  • Ulrich Volz

    (SOAS Centre for Sustainable Finance & Department of Economics, SOAS University of London)

  • Neil R. Edwards

    (Environment, Earth and Ecosystems, The Open University, UK)

Abstract

Transition risks for finance arise from the transition to a low-carbon economy, which can disrupt the ability of carbon-intensive industries to meet their financial obligations and lead to abrupt changes in asset valuations of affected firms and default on their debt. An understanding of these risks is key for any ambitious emissions reduction programme, such as that implied by the Paris Agreement. Insight from theory and study of past transitions is of limited help, as these see financial risks mostly flowing from speculation with rising industries propped up by a set of new vastly more productive technologies. The current transition instead requires policy to quickly render a set of currently productive high-carbon industries unprofitable, stranding their assets, so the risks are located in the declining industries. Absent a unified framework of the interaction of real and financial aspects of the transition, one set of studies conceptualises and quantifies asset stranding and other transition costs in declining industries, and a separate one estimates the potential impact of these transition costs on the financial system. Combining these two research strands and modelling the feedback of financial distress on the real economy will require more research, which could help integrate transition risks into the cost analysis of mitigation in integrated assessment models. An important insight from the past transitions literature is that once low-carbon industries are rendered more profitable than high-carbon ones, financial risks could also build in these newly rising industries due to speculation.

Suggested Citation

  • Gregor Semieniuk & Emanuele Campiglio & Jean-Francois Mercure & Ulrich Volz & Neil R. Edwards, 2020. "Low-carbon transition risks for finance," Working Papers 233, Department of Economics, SOAS, University of London, UK.
  • Handle: RePEc:soa:wpaper:233
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    Cited by:

    1. David Friederich & Lynn H. Kaack & Alexandra Luccioni & Bjarne Steffen, 2021. "Automated Identification of Climate Risk Disclosures in Annual Corporate Reports," Papers 2108.01415, arXiv.org.
    2. Huang, Bihong & Punzi, Maria Teresa & Wu, Yu, 2022. "Environmental regulation and financial stability: Evidence from Chinese manufacturing firms," Journal of Banking & Finance, Elsevier, vol. 136(C).
    3. John Beirne & Yannis Dafermos & Alexander Kriwoluzky & Nuobu Renzhi & Ulrich Volz & Jana Wittich, 2021. "The Effects of Natural Disasters on Price Stability in the Euro Area," Discussion Papers of DIW Berlin 1981, DIW Berlin, German Institute for Economic Research.
    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. Hansen, T.A., 2022. "Stranded assets and reduced profits: Analyzing the economic underpinnings of the fossil fuel industry's resistance to climate stabilization," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).

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    More about this item

    Keywords

    Transition risks; low-carbon economy; declining industries; stranded assets; financial distress;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • N2 - Economic History - - Financial Markets and Institutions
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

    NEP fields

    This paper has been announced in the following NEP Reports:

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