Assessing credit risk sensitivity to climate and energy shocks: Towards a common minimum standards in line with the ECB climate agenda

Stefano Di Virgilio, Ivan Faiella, Alessandro Mistretta and Simone Narizzano

Journal of Policy Modeling, 2024, vol. 46, issue 3, 552-568

Abstract: A disordered energy transition might impact borrowers’ ability to repay and service debt; this calls for methods for integrating climate into credit risk modelling. This integration is required not only for risk management, but also for adjusting credit ratings for collateral pledged in Eurosystem monetary policy operations. This study introduces an innovative methodology to evaluate Italian non-financial firms' exposure to climate policy risks, gauging the impact of climate policies on firm-level default probability (PD). By simulating a shock to energy expenditure originating from different levels of a carbon tax, we analyze the potential impact on firms’ PD. Our method offers a comprehensive understanding of the channels through which energy shocks propagate and their implications on firms’ vulnerability. Our findings show that the impact of carbon taxation on credit risk would be contained, raising the average PD by a range of 0.6–4.1 basis points according to the different levels of carbon tax. The effect is slightly larger for the Agriculture and Services sector, while there is no clear pattern relating to firm size.

Keywords: Climate change; Carbon tax; Credit risk (search for similar items in EconPapers)
JEL-codes: Q41 Q54 Q58 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Assessing credit risk sensitivity to climate and energy shocks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:46:y:2024:i:3:p:552-568

DOI: 10.1016/j.jpolmod.2024.05.001

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