A Finance Approach to Climate Stress Testing

Dirk Schoenmaker, Henk Jan Reinders and Mathijs Van Dijk

No 14609, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box†macro-modelling approach to climate stress testing or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We take a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of corporate debt and residential mortgages. We calibrate the model using detailed, proprietary exposure data for the Dutch banking sector. For a €100 to €200 per tonne carbon tax we find a substantial decline in the market value of banks’ assets equivalent to 4-63% of core capital, depending on policy choices.

Keywords: Climate stress test; Contingent claims analysis; Climate policies; Carbon tax; Banks (search for similar items in EconPapers)
JEL-codes: G13 G21 H23 Q54 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (13)

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Journal Article: A finance approach to climate stress testing (2023)
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