Working Paper: CEPR ID: DP14609
Authors: Henk Jan Reinders; Dirk Schoenmaker; Mathijs A. van Dijk
Abstract: There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box” macro-modelling approach to climate stress testing or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We take a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of corporate debt and residential mortgages. We calibrate the model using detailed, proprietary exposure data for the Dutch banking sector. For a €100 to €200 per tonne carbon tax we find a substantial decline in the market value of banks’ assets equivalent to 4-63% of core capital, depending on policy choices.
Keywords: climate stress test; contingent claims analysis; climate policies; carbon tax; banks
JEL Codes: G13; G21; H23; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon tax shock (H23) | market value of banks' assets (G21) |
| carbon tax shock (H23) | corporate loans and debt (G32) |
| carbon tax shock (H23) | residential mortgages (G21) |
| higher carbon taxes (H23) | asset values (G32) |
| increased costs for firms (D21) | higher credit risk (G21) |
| higher credit risk (G21) | potential defaults (G33) |