Model-based financial regulations impair the transition to net-zero carbon emissions
Matteo Gasparini,
Matthew C. Ives,
Ben Carr,
Sophie Fry and
Eric Beinhocker
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
Abstract:
Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments.
JEL-codes: Q30 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2024-05-01
New Economics Papers: this item is included in nep-acc, nep-ban, nep-eec, nep-ene, nep-env and nep-eur
References: Add references at CitEc
Citations:
Published in Nature Climate Change, 1, May, 2024, 14(5), pp. 476 - 481. ISSN: 1758-678X
Downloads: (external link)
http://eprints.lse.ac.uk/122630/ Open access version. (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:122630
Access Statistics for this paper
More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().