Climate Transition Risk and Financial Stability in France

By Rachel Lee, Hugo Rojas-Romagosa, Iulia Ruxandra Teodoru, Xiaoxiao Zhang

July 12, 2024

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Rachel Lee, Hugo Rojas-Romagosa, Iulia Ruxandra Teodoru, and Xiaoxiao Zhang. Climate Transition Risk and Financial Stability in France, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This study empirically investigates the impact of the climate transition on the French financial sector using a micro-macro approach to examine the long-term effects of climate mitigation and decarbonization policies on sectoral output and the effects on firm profitability and the likelihood of corporate defaults. We employ a recursive-dynamic, multi-regional, multi-sectoral computable general equilibrium (CGE) model to simulate the Fit-for-55 climate scenario and then integrate the sectoral output paths derived from the model into firm-level corporate balance sheets and risks. We then assess the extent of credit exposure of banks to energy-intensive sectors. Our findings indicate that, under the Fit-for-55 scenario, the mining, chemicals and manufacturing sectors might face notable increases in their probability of defaults, in turn creating pockets of vulnerabilities in some parts of the banking system depending on their exposure to these energy-intensive sectors. This highlights the importance for a timely and orderly transition, including integrating climate transition plans into the prudential framework.

Subject: Climate change, Environment, Greenhouse gas emissions

Keywords: Climate change, Climate risk analysis, Climate scenario, Climate transition risk, ENVISAGE model, Financial stability, Fit-for-55, Global, Greenhouse gas emissions, Scenario assumption, Vulnerability data

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/144
Stock No:

WPIEA2024144
ISBN:

9798400280696
ISSN:

1018-5941

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