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

Maria Alessia Aiello and Cristina Angelico

No 688, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: climate change; carbon tax; climate stress test; banks’ credit risk (search for similar items in EconPapers)
JEL-codes: G21 Q43 Q48 Q58 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-eec, nep-ene, nep-env, nep-fdg, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (5)

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Journal Article: Climate change and credit risk: The effect of carbon tax on Italian banks' business loan default rates (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_688_22

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