Measuring Climate Transition Risk at the Regional Level with an Application to Community Banks

Mitchell Berlin, SungJe Byun, Pablo D'Erasmo and Edison Yu

No 25-11, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We develop a measure of climate transition risk for regional economies in the U.S., based on the mix of firms that produce emissions in each region. To quantify transition risks, we consider the introduction of an emissions tax levied on companies emitting greenhouse gases and estimate changes in the market values of industries due to a carbon tax using Merton’s (1974) model. We find that transition risks are highly concentrated in a few sectors and counties with heavy exposures to transition-sensitive sectors. The size and geographic concentration of the tax effects depend significantly on assumptions about the elasticity of demand for inputs in the production chain. When applying county-level estimates for transition risks to banks’ deposit footprint, we find mild to moderate transition risks for community banks as a whole, although transition risks are high for a few banks.

Keywords: Greenhouse Gas Emissions; Transition Risk; Carbon Taxes; Regional Transition Risks; Bank Exposure (search for similar items in EconPapers)
JEL-codes: C53 Q21 Q51 Q54 R11 R15 (search for similar items in EconPapers)
Pages: 60
Date: 2025-03-21
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Journal Article: Measuring climate transition risk at the regional level with an application to community banks (2024)
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DOI: 10.21799/frbp.wp.2025.11

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