 Climate change and credit risk: The effect of carbon tax on Italian banks' business loan default ratesMaria Alessia Aiello and Cristina Angelico Journal of Policy Modeling, 2023, vol. 45, issue 1, 187-201 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. (2022), 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 the introduction of a carbon tax - during periods of low default rates - are modest for banks: on average, over 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 below their historical peaks. Keywords: Climate change; Carbon tax; Climate stress test; Banks’ credit risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:45:y:2023:i:1:p:187-201 DOI: 10.1016/j.jpolmod.2022.11.007 Access Statistics for this article Journal of Policy Modeling is currently edited by A. M. Costa More articles in Journal of Policy Modeling from Elsevier |
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