Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/223558
Authors: 
Diluiso, Francesca
Annicchiarico, Barbara
Kalkuhl, Matthias
Minx, Jan C.
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8486
Abstract: 
Limiting global warming to well below 20C may result in the stranding of carbon-sensitive assets. This could pose substantial threats to financial and macroeconomic stability. We use a dynamic stochastic general equilibrium model with financial frictions and climate policy to study the risks a low-carbon transition poses to financial stability and the different instruments central banks could use to manage these risks. We show that, even for very ambitious climate targets, transition risks are limited for a credible, exponentially growing carbon price, although temporary “green paradoxes” phenomena may materialize. Financial regulation encouraging the decarbonization of the banks’ balance sheets via tax-subsidy schemes significantly reduces output losses and inflationary pressures but it may enhance financial fragility, making this approach a risky tool. A green credit policy as a response to a financial crisis originated in the fossil sector can potentially provide an effective stimulus without compromising the objective of price stability. Our results suggest that the involvement of central banks in climate actions must be carefully designed in compliance with their mandate to avoid unintended consequences.
Subjects: 
climate policy
financial instability
financial regulation
green credit policy
monetary policy
transition risk
JEL: 
E50
H23
Q43
Q50
Q58
Document Type: 
Working Paper

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