11 Mar 2016

Too late, too sudden: Transition to a low-carbon economy and systemic risk

Daniel Gros / Dirk Schoenmaker

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Authors: Daniel Gros and Dirk Schoenmaker et al.

Series: Researchers’ work published externally

Report by a group of the Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB), chaired by CEPS Director Daniel Gros and Dirk Schoenmaker, Senior Fellow at Bruegel and Professor of Banking and Finance at Rotterdam School of Management, Erasmus University Rotterdam, with drafting and analytical assistance from Sam Langfield and Sini Matikainen. In addition, the group included the chair and co-chairs of the ASC: Philip Lane, Marco Pagano and Javier Suarez.

Keeping global warming below 2°C will require substantial reductions in global greenhouse gas emissions over the next few decades. To reduce emissions, economies must reduce their carbon intensity. In an adverse scenario, the transition to a low-carbon economy occurs late and abruptly. This scenario would affect systemic risk via three main channels: i) the macroeconomic impact of sudden changes in energy use, ii) the revaluation of carbon-intensive assets and iii) a rise in the incidence of natural catastrophes. The overall systemic risk implications depend on the level of financial institutions’ exposure to carbon-intensive assets and the specific form of emission abatement policies, both of which are highly uncertain. In the short-term, increased disclosure and further research could help to better quantify macroeconomic risks. In the medium-term, the availability of granular data and dedicated low-frequency stress tests will provide information about the impact of the adverse scenario on the financial system.

Also availabel for free download at: https://www.esrb.europa.eu/pub/html/index.en.html