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Measuring climate transition risk at the regional level with an application to community banks

Author

Listed:
  • Berlin, Mitchell
  • Byun, Sung Je
  • D'Erasmo, Pablo
  • Yu, Edison

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.

Suggested Citation

  • Berlin, Mitchell & Byun, Sung Je & D'Erasmo, Pablo & Yu, Edison, 2024. "Measuring climate transition risk at the regional level with an application to community banks," European Economic Review, Elsevier, vol. 170(C).
    • Handle: RePEc:eee:eecrev:v:170:y:2024:i:c:s0014292124001636
    DOI: 10.1016/j.euroecorev.2024.104834
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    More about this item

    Keywords

    Greenhouse gas emissions; Transition risk; Carbon taxes; Regional transition risks; Bank exposure;
    All these keywords.

    JEL classification:

    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods
    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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