Climate change and credit risk: The effect of carbon tax on Italian banks' business loan default rates |
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| Institution: | 1. Bank of Italy, Directorate General for Financial Supervision and Regulation, Macroprudential Analysis Division, Italy;2. Bank of Italy, Secretariat to the Governing Board, Climate Change and Sustainability Hub, Italy;1. Western Galilee College, Department of Economics, Israel;2. University College London, Cancer Institute, Department of Cancer Biology, United Kingdom;1. Centre for Policy Research & International Studies, Universiti Sains Malaysia, Malaysia;2. Sunway Business School, Sunway University, 47500, Selangor, Malaysia;3. Department of Economics, University of Colorado Boulder, USA;4. Department of Urban Industrial Management and Marketing, University of Taipei, Taiwan;1. Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore, Milan, Italy;2. Dipartimento di Diritto, Economia e Culture, Università dell’Insubria, Como, Italy;3. Institut d′Economia de Barcelona (IEB), Spain;1. Hamburg University, Department of Economics, Germany;2. Tallinn University of Technology, Department of Economics and Finance, Estonia;3. National Taiwan University, Department of Economics, Taiwan;4. ASEAN+3 Macroeconomic Research Office – AMRO, Singapore |
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| 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. |
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| Keywords: | Climate change Carbon tax Climate stress test Banks’ credit risk |
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