Will fighting climate change affect commercial banks? A carbon tax policy simulation

Linna Han, Mohammad Zoynul Abedin, Xianzi Wang, Samar S. Alharbi and Yong Wang

International Review of Financial Analysis, 2024, vol. 96, issue PB

Abstract: Policies implemented to address climate change, especially carbon tax policies, have profound impacts on risk management and credit losses in the financial system. Existing research suggests that climate risks may lead to high‑carbon-emission companies facing asset stranding and credit downgrades; however, their specific effects on credit losses in the banking system have not been thoroughly elucidated. This study uses data from 21 listed Chinese commercial banks and 3163 firms for 2020, applying climate stress-testing to construct 16 carbon tax scenarios. These scenarios simulate the effects of a carbon tax on firms' asset values and financial stability and estimate the potential transmission of these effects to credit losses in Chinese commercial banks. Our findings reveal that introducing a carbon tax significantly increases bank credit losses, with credit losses escalating exponentially as tax rates increase. State-owned commercial banks experience the highest losses, followed by joint-stock and city banks. The primary contributors to these credit losses are high‑carbon industries such as electricity, manufacturing, and transportation. These findings underscore how carbon tax policies can decrease firms' asset values and thereby increase banks' credit risks, providing essential insights for policymakers designing climate policies.

Keywords: Climate transition risk; Carbon tax; Commercial banks; Credit losses; Carbon-intensive industries (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924007191

DOI: 10.1016/j.irfa.2024.103787

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