IDEAS home Printed from https://ideas.repec.org/p/bdi/wpmisp/mip_041_23.html
   My bibliography  Save this paper

Assessing credit risk sensitivity to climate and energy shocks

Author

Listed:
  • Stefano Di Virgilio

    (Bank of Italy)

  • Ivan Faiella

    (Bank of Italy)

  • Alessandro Mistretta

    (Bank of Italy)

  • Simone Narizzano

    (Bank of Italy)

Abstract

We apply a novel method to estimate the impact of a change in energy expenditure on Italian firms’ credit risk, measured as the 12-month default probability (PD). We examine a shock to energy expenditure originating from different carbon tax levels and then 1) shock energy prices; 2) re‑compute the firm-level energy mix; 3) assess the impact on the firm PD via the re‑calculation of its financial statement. The flexibility of this approach, which includes scope 2 emissions, enables us to assess the transmission channels of energy shocks and firm exposure in detail. Our results show that the introduction of carbon taxation would have a limited impact on credit risk: a carbon tax of EUR 40, EUR 90 and EUR 140 per tonne of CO2 would raise the average PD by 0.6, 2.3 and 4.1 basis points, respectively. The effect is slightly larger for the Agriculture and Services sectors, while there is no clear pattern relating to firm size.

Suggested Citation

  • Stefano Di Virgilio & Ivan Faiella & Alessandro Mistretta & Simone Narizzano, 2023. "Assessing credit risk sensitivity to climate and energy shocks," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 41, Bank of Italy, Directorate General for Markets and Payment System.
    • Handle: RePEc:bdi:wpmisp:mip_041_23
    as

    Download full text from publisher

    File URL: https://www.bancaditalia.it/pubblicazioni/mercati-infrastrutture-e-sistemi-di-pagamento/approfondimenti/2023-041/N.41-MISP.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Faiella, Ivan & Lavecchia, Luciano & Michelangeli, Valentina & Mistretta, Alessandro, 2022. "A climate stress test on the financial vulnerability of Italian households and firms," Journal of Policy Modeling, Elsevier, vol. 44(2), pages 396-417.
    2. Ivan Faiella & Alessandro Mistretta, 2015. "Spesa energetica e competitività delle imprese italiane," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2015(3), pages 85-121.
    3. Filippo Giovannelli & Alessandra Iannamorelli & Aviram Levy & Marco Orlandi, 2020. "The In-house credit assessment system of Banca d'Italia," Questioni di Economia e Finanza (Occasional Papers) 586, Bank of Italy, Economic Research and International Relations Area.
    4. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    5. Robert Vermeulen & Edo Schets & Melanie Lohuis & Barbara Kolbl & David-Jan Jansen & Willem Heeringa, 2018. "An energy transition risk stress test for the financial system of the Netherlands," DNB Occasional Studies 1607, Netherlands Central Bank, Research Department.
    6. Irene Monasterolo, 2020. "Climate Change and the Financial System," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 299-320, October.
    7. Ivan Faiella & Luciano Lavecchia, 2021. "Households' energy demand and the effects of carbon pricing in Italy," Questioni di Economia e Finanza (Occasional Papers) 614, Bank of Italy, Economic Research and International Relations Area.
    8. Aiello, Maria Alessia & Angelico, Cristina, 2023. "Climate change and credit risk: The effect of carbon tax on Italian banks' business loan default rates," Journal of Policy Modeling, Elsevier, vol. 45(1), pages 187-201.
    9. Körding, Julia & Resch, Florian, 2022. "Common minimum standards for incorporating climate change risks into in-house credit assessment systems in the Eurosystem," Economic Bulletin Boxes, European Central Bank, vol. 6.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Weth, Mark A. & Baltzer, Markus & Bertram, Christoph & Hilaire, Jérôme & Johnston, Craig, 2024. "The scenario-based equity price impact induced by greenhouse gas emissions," Discussion Papers 30/2024, Deutsche Bundesbank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Faiella, Ivan & Lavecchia, Luciano & Michelangeli, Valentina & Mistretta, Alessandro, 2022. "A climate stress test on the financial vulnerability of Italian households and firms," Journal of Policy Modeling, Elsevier, vol. 44(2), pages 396-417.
    2. Aiello, Maria Alessia & Angelico, Cristina, 2023. "Climate change and credit risk: The effect of carbon tax on Italian banks' business loan default rates," Journal of Policy Modeling, Elsevier, vol. 45(1), pages 187-201.
    3. Emambakhsh, Tina & Fuchs, Maximilian & Kördel, Simon & Kouratzoglou, Charalampos & Lelli, Chiara & Pizzeghello, Riccardo & Salleo, Carmelo & Spaggiari, Martina, 2023. "The Road to Paris: stress testing the transition towards a net-zero economy," Occasional Paper Series 328, European Central Bank.
    4. Alogoskoufis, Spyros & Dunz, Nepomuk & Emambakhsh, Tina & Hennig, Tristan & Kaijser, Michiel & Kouratzoglou, Charalampos & Muñoz, Manuel A. & Parisi, Laura & Salleo, Carmelo, 2021. "ECB’s economy-wide climate stress test," Occasional Paper Series 281, European Central Bank.
    5. Gregor Semieniuk & Emanuele Campiglio & Jean‐Francois Mercure & Ulrich Volz & Neil R. Edwards, 2021. "Low‐carbon transition risks for finance," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 12(1), January.
    6. Vermeulen, Robert & Schets, Edo & Lohuis, Melanie & Kölbl, Barbara & Jansen, David-Jan & Heeringa, Willem, 2021. "The heat is on: A framework for measuring financial stress under disruptive energy transition scenarios," Ecological Economics, Elsevier, vol. 190(C).
    7. Paola D'Orazio & Jessica Reale & Anh Duy Pham, 2023. "Climate-induced liquidity crises: interbank exposures and macroprudential implications," Chemnitz Economic Papers 059, Department of Economics, Chemnitz University of Technology.
    8. Talan B. İşcan & Benjamin Dennis, 2024. "A New Measure of Climate Transition Risk Based on Distance to a Global Emission Factor Frontier," Finance and Economics Discussion Series 2024-017, Board of Governors of the Federal Reserve System (U.S.).
    9. Enrico Bernardini & Ivan Faiella & Luciano Lavecchia & Alessandro Mistretta & Filippo Natoli, 2021. "Central banks, climate risks and sustainable finance," Questioni di Economia e Finanza (Occasional Papers) 608, Bank of Italy, Economic Research and International Relations Area.
    10. Eszter Boros, 2020. "Risks of Climate Change and Credit Institution Stress Tests," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(4), pages 107-131.
    11. Lamperti, Francesco & Bosetti, Valentina & Roventini, Andrea & Tavoni, Massimo & Treibich, Tania, 2021. "Three green financial policies to address climate risks," Journal of Financial Stability, Elsevier, vol. 54(C).
    12. Serhan Cevik, 2024. "Climate change and energy security: the dilemma or opportunity of the century?," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 26(3), pages 653-672, July.
    13. Mercy Berman DeMenno, 2023. "Environmental sustainability and financial stability: can macroprudential stress testing measure and mitigate climate-related systemic financial risk?," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(4), pages 445-473, December.
    14. Lane, Philip R., 2019. "Climate Change and the Irish Financial System," Economic Letters 1/EL/19, Central Bank of Ireland.
    15. Waffenschmidt, Brigitte, 2021. "Nachhaltigkeit: Modewort oder Erwartung der Generation Y an ihre Arbeitgeber," EconStor Research Reports 246810, ZBW - Leibniz Information Centre for Economics.
    16. Vikniswari Vija Kumaran & Siti Nurul Munawwarah & Mohd Khairi Ismail, 2021. "Sustainability in ASEAN: The Roles of Financial Development towards Climate Change," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 8(1), pages 1-9.
    17. Agarwala, Matthew & Burke, Matt & Klusak, Patrycja & Mohaddes, Kamiar & Volz, Ulrich & Zenghelis, Dimitri, 2021. "Climate Change And Fiscal Sustainability: Risks And Opportunities," National Institute Economic Review, National Institute of Economic and Social Research, vol. 258, pages 28-46, November.
    18. Irene Monasterolo & Monica Billio & Stefano Battiston, 2020. "The importance of compound risk in the nexus of COVID-19, climate change and finance," Working Papers 2020:15, Department of Economics, University of Venice "Ca' Foscari".
    19. Senni, Chiara Colesanti & Pagliari, Maria Sole & van 't Klooster, Jens, 2023. "The CO2 content of the TLTRO III scheme and its greening," LSE Research Online Documents on Economics 120562, London School of Economics and Political Science, LSE Library.
    20. Paolo Angelini, 2024. "Portfolio decarbonisation strategies: questions and suggestions," Questioni di Economia e Finanza (Occasional Papers) 840, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    climate change; carbon tax; credit risk;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:wpmisp:mip_041_23. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bdigvit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.