An Estimate of Climate-Related Transition Risk in Irish Mortgage Lending

Climate change will potentially affect households through direct weather/climate-related damages (“physical risks”) and the policy changes required to achieve a global decarbonisation of production and consumption (“transition risks”). The potential financial stability and economic implications of various transition risk channels are currently difficult to measure due to the nature of data available to most authorities. This paper proposes a new methodology to populate loan-level data with borrower energy and emissions estimates to facilitate the analysis of transition risks. Using these estimates, we consider the possible impacts of a number of future medium and long run carbon price scenarios to household resilience. In our framework, the current carbon intensity of households is key to explaining vulnerability in the transition to net zero, with rural and, in particular, low-income households most at risk. The speed of adopting energy-saving technologies and behaviours are important determinants for mitigating these vulnerabilities. We note that our estimation framework, while providing a platform to analyse climate risk, does not replace the need to collect data from source.