## sipea2024033

## Source details

**Canonical URL:** [sipea2024033](https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024033.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024033.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024033.pdf.json)

---

### EU climate policies and emission targets
- EU commitments:
  - Reduce emissions to 55 percent below 1990 levels by 2030 (“Fit-for-55”) and carbon neutrality by 2050.
  - Annual emissions reductions need to increase from 1.2 percent (since 1990) to five percent through 2030 and continuing until net zero is reached.
  - European Commission proposing an intermediate target of a 90 percent reduction by 2040.
  - Revised National Energy and Climate Plans planned for mid-2024.
- EU Emissions Trading System (ETS):
  - Covers large emissions sources from energy, industry, within-European Economic Area (EEA) aviation, waste, and maritime transport.
  - Currently covers about 38 percent of total EU GHGs (WBG 2023).
  - Annual allowance volume decline: presently 2.2 percent per year; from January 1, 2024 increases to 4.3–4.4 percent annually to comply with “Fit-for-55”.
  - By 2040, the volume of allowances allocated will be reduced to zero.
  - Allowance prices: rose to around €90 per tonne in 2021; fallen to about €70-75 per tonne more recently.
  - Separate ETS for road transportation, buildings, small industry and construction to be introduced in 2027; cap declines linearly by five percent per year from 2024 emission levels.
  - Recommendation: revenues from the ETS should be spent on green measures, including to support vulnerable households and small businesses through the Social Climate Fund.
- Key directives/instruments mentioned:
  - Renewable Energy Directive (legally binding as of 2021).
  - Energy Efficiency Directive.
  - Energy Taxation Directive updates.
  - Energy Performance of Buildings Directive.
  - CO2 emissions performance standards for road transportation (all new passenger vehicles and vans to be zero-carbon by 2035).

### France: targets, recent progress, and projections
- National targets:
  - Economy-wide: -52% relative to 2005 by 2030.
  - Non-ETS sectors: -47.5% relative to 2005 by 2030.
  - ETS sectors: table-captioned target -62% relative to 2005 by 2030-34% (sectoral table entries mixed).
- Emissions and sector shares (2022):
  - France accounts for 0.9 percent of global emissions.
  - Sectoral shares: Transportation 32 percent, Agriculture 19 percent, Industry 18 percent, Buildings 16 percent, Power generation 11 percent.
  - Since 2005, emissions decreased by 23 percent.
  - Sectoral reductions since 2005: power generation, industry, and buildings falling by around 40 percent each; agriculture and transport by 10 percent.
- Projected trajectory under current/no additional policies:
  - By 2030, total emissions estimated to decrease by 1 percent below 2022 levels (IMF’s CPAT).
- NECP assessment:
  - France’s 2020 NECP policies expected to contribute 33.5 percent emissions reduction by 2030 relative to 2005 (48.1 percent for EU ETS and 28.7 percent for non-ETS sectors).
  - 2023 EEA/EU Commission assessment: NECP policies do not fully close the gap to 2030 targets.
- Table 1 excerpts (assessment relative to 2005):
  - ETS sectors, emissions: Target -62% relative to 2005 by 2030-34% | CPAT: -29% | EEA: -48.1%
  - Power sector: Target -40% relative to 2005 by 2030-36% | CPAT: -35% | EEA: -56.2%
  - Industry: Target -68% relative to 2005 by 2030-33% | CPAT: -28% | EEA: -38.9%
  - Non-ETS sectors, emissions: Target -47.5% relative to 2005 by 2030-18% | CPAT: -24% | EEA: -28.7%
  - Transport: Target -41% relative to 2005 by 2030-11% | CPAT: -34% | EEA: -28.1%
  - Buildings: Target -75% relative to 2005 by 2030-28% | CPAT: -19% | EEA: -31.4%
  - Agriculture: Target -18% relative to 2005 by 2030-11% | CPAT: -10% | EEA: -6.5%
  - Waste: Target -24% | CPAT: -26%
  - Economy-wide: Target -52% relative to 2005 by 2030 | 2021–2030 assessment: -22% | CPAT: -23% | EEA: -33.5%
  - Power, renewable share: At least 33% by 2030; 50% of power production with nuclear energy by 2035 | 24.8% | CPAT: 33.6%
- Key implication:
  - France has made progress but additional policies are needed—particularly in buildings, transportation, and heavy industry—to meet national and EU targets.

### Climate vulnerabilities and sectoral exposure
- Most exposed assets: Power generation, buildings, and agriculture.
- Key vulnerabilities:
  - Prolonged droughts and water scarcity reduce hydroelectricity and electricity output from nuclear power (nuclear = 63 percent of France’s electricity production in 2022).
  - Rising river water temperatures can cause temporary shutdowns and affect cooling of nuclear reactors (56 reactors).
  - Heat stress reduces labor productivity and impacts tourism flows.
  - Building sector vulnerable to river floods and heatwaves; insurance claims in building sector for natural disasters expected to reach €4.6 billion per year from 2020 to 2050 (France Stratégie).
- Projected damages:
  - Droughts cost power generation and agricultural assets about €2.8 billion per year.
  - Higher volatility of agricultural production can affect food security more than peers (Global Food Security Index).

### Macroeconomic implications and ENVISAGE CGE modeling
- Investment needs and GDP impacts (literature):
  - Transition investment requirement estimated at around €63-66 billion (about 2.8 percent of GDP) per year between now and 2030 (Pisani-Ferry and Mahfouz (2023)).
  - Potential GDP could decline by 1.5–2 percentage points by 2030 under assumed productivity reductions; actual GDP decline roughly 1 percentage point in that simulation.
- ENVISAGE model:
  - Recursive-dynamic, multi-regional, multi-sectoral CGE model covering 24 countries/regions and 36 sectors.
  - Optimizes consumption and production; simulates impacts on energy, GHG, macro variables, sectoral outcomes, and trade.
  - Limitation: does not account for adjustment costs when factors reallocate; not well suited for short-term dynamics or transition paths.

### Fit-for-55 (FF55) scenario calibration and results
- Global assumptions:
  - Carbon price in current EU-ETS and UK ETS rises to $185 per ton in 2030.
  - Three additional policies: increase heat pump use; regulations for energy efficiency in transportation and buildings; easing permits for renewable energy investment.
  - Only the EU, UK and EFTA achieve their NDC targets; rest of world has no mitigation policies.
- Calibration specifics:
  - Energy-efficiency regulation costs: 5.8 percent of gross annual fixed investment in each European country.
  - Heat pumps reduce household energy demand by 11 percent; calibrated cost 0.6 percent of gross annual fixed investment.
  - Easing permits increases wind and solar productivity leading to 10 percent more renewable generation in 2030 vs. baseline.
  - These policies calibrated to reach 55 percent emission reduction by 2030 relative to 1990.
- France energy mix and GDP impacts by 2030 (relative to baseline):
  - Energy mix: No energy from coal or oil; lower gas and nuclear; higher wind generation.
  - Real GDP impacts:
    - Revenues recycled via reduction of labor taxes: Real GDP could be 1.3 percent lower relative to the baseline by 2030.
    - Revenues recycled via cash transfers to households (budget neutral): Real GDP could be 1.6 percent lower relative to the baseline by 2030.
    - Interpretation: labor tax reductions more efficient than cash transfers.
  - Most affected sectors: mining, oil & gas, manufacturing, chemicals, and utilities.
  - Abatement costs: lower for energy sector (renewables) and higher for agriculture, transport, and industrial processes.

### Carbon pricing in France: status and comparisons
- Current explicit carbon contribution:
  - Contribution Climat-Énergie (CCE) = €44.6/tCO2 covering mainly heating, transport, and non-ETS 1 industry.
- Fuel excises (per tonne of CO2 when used for transportation):
  - Unleaded petrol: €291 per tonne of CO2.
  - Diesel (transport): €196 per tonne of CO2.
  - Reduced excise rates for diesel used for heating and non-transport commercial activities.
- Effective carbon pricing coverage and levels:
  - OECD estimates 71 percent of GHG emissions in France covered by net positive effective pricing; average level €83/tCO2 eq.
  - OECD average: 53 percent coverage; average pricing level €34/tCO2 eq.
  - French Ministry of Energy Transition reports average effective carbon price linked to energy combustion €104/tCO2 in 2022.
- Sectoral notes:
  - Road transportation carbon prices: in line with EU or advanced EU averages, but below some neighbors and below levels needed to meet targets under current trends.
  - Industry carbon prices: slightly lower than EU peers; around 16 percent of industrial sector emissions not covered by ETS 1.
  - Buildings carbon prices: slightly higher than EU peers.
  - Agriculture effective carbon price rates remain significantly lower (non-road diesel implicitly subsidized).
- Upcoming EU-level change: new ETS for road transportation, buildings, small industry and construction in 2027.

### Rationale for raising carbon pricing in non-ETS 1 sectors
- Advantages:
  - Provides economy-wide incentives to reduce energy use and shift to cleaner fuels.
  - Minimizes mitigation costs by equalizing marginal abatement costs across fuels and sectors when price is uniform.
  - Generates revenues and domestic co-benefits (e.g., reduced local air pollution mortality).
  - Administratively straightforward leveraging existing excise tax system.
- European context: non-ETS 1 prices in several European countries range from €35 to €110 per ton.
- France has postponed increasing its price relative to peers.

### CPAT illustrative $100 per ton non-ETS 1 carbon price scenario (impacts vs. BAU)
- Scenario: additional carbon price progressively reaching $100 per ton on non-ETS 1 sectors; BAU includes only existing fiscal policies and excludes planned EU ETS for transport/buildings and regional renovation obligations.
- Projected impacts:
  - Non-ETS 1 emissions reduced by nearly 10 percent below BAU.
  - Economic efficiency costs: 0.3 percent of GDP (deadweight losses in fuel markets; excludes revenue recycling benefits and tax interaction effects).
  - Welfare benefits from reduced air pollution and other co-benefits: 0.1 percent of GDP (benefits net of consumer welfare losses).
  - The carbon price would mobilize additional revenues (text notes revenue mobilization; exact revenue appears in source visualizations).
- Distributional impacts and revenues:
  - Loss in purchasing power for the four lowest income deciles: 1.5 percent of total consumption (fourth decile slightly higher at 1.6 percent).
  - Rural households face about 0.5 percent higher losses versus urban across deciles.
  - Total fossil fuel excise taxes would amount to 3.5 percent of GDP in 2030.
  - Additional revenue from the $100 per ton carbon price equals 0.8 percent of GDP (around 22 percent of total carbon pricing revenue).
  - All additional revenue (0.8 percent of GDP) could fully compensate households in the bottom four income deciles without overcompensating them.
- Policy recommendation on support:
  - Use income-based measures (e.g., cash transfers) to protect vulnerable households while preserving price signals.
  - Avoid conditioning support on energy expenditure; conditionality subsidizes energy inefficiency and raises investment costs in emissions reductions.
- Energy-intensive firms would see a 1–5 percent increase in input costs due to higher energy prices.

### Efficiency of energy prices and carbon pricing design
- First-best fuel pricing regime components:
  - Full passthrough of commodity supply costs.
  - A carbon price equal to CO2 damage or aligned with mitigation targets.
  - An excise for local externalities from fossil combustion.
  - The standard VAT rate.
- Policy design points:
  - Transitioning from a gradually increasing non-ETS carbon price to a domestic price floor for the EU ETS helps achieve efficient fuel prices and equalize abatement costs.
  - A carbon price of $100 by 2030 on non-ETS activities could serve as a price floor for the ETS.

### Sectoral mitigation policies: role and design
- Sectoral policies complement carbon pricing to balance fiscal, equity, and acceptability objectives.
- Cost-effective sectoral policies should mimic carbon pricing incentives and can:
  - Condition subsidies on household income.
  - Provide public goods (public transport).
  - Promote R&D positive externalities and domestic competitiveness.
  - Protect against carbon leakage.
- France’s scope:
  - Existing decarbonization policies in buildings, transportation, industry, and power.
  - Opportunity to increase effectiveness while limiting fiscal costs, with focus on buildings and transport.

### Transportation: policies, projections, and reform options
- Current spending and instruments (2024/2023 figures):
  - Direct spending on rail, river, and right-of-way public road transport planned to exceed €4 billion in 2024.
  - €1.3 billion budgeted for the ecological bonus (electric passenger vehicle subsidy up to €7,000).
  - Ecological malus: €0.8 billion in 2023 (taxes on vehicles by emissions-intensity and weight).
  - Fuel excises: €0.59 and €0.68 per liter for diesel and petrol respectively; €32 per megawatt hour of electricity; VAT at 20 percent.
  - Heavy goods receive partial diesel excise rebate.
  - As of 2024, all EV subsidies conditional on emissions-intensity of production, excluding about 35 percent of EVs previously eligible.
- Emissions and electricity demand projections:
  - Road transportation emissions fall from 2024: 94 million tons in 2030 and 66 million tons in 2035.
  - Proposed carbon budget: 75 million tons from 2029 to 2033 (2023 Draft NECP); SGPE provisional target 81 million tons in 2030 (SGPE 2023).
  - Electricity demand from road transportation projected to grow from 4 TWh in 2023 to 31 TWh in 2030; total national electricity use around 450 TWh in 2023.
  - Fiscal revenue expected to decline from around 1.4 percent of GDP to close to 1 percent by 2029 as electrification progresses.
- Reform options:
  - Convert bonus/malus to a linear feebate:
    - Continuous incentives; can be approximately revenue neutral by setting pivot point slightly below revenue-neutral level based on prior year sales.
    - Would reduce incentives for fuel-efficient ICEVs or plug-in hybrids under current discontinuous regime; means-tested subsidy can address equity.
    - Apply analogous linear scheme to heavy goods vehicles with sector-specific pivots.
  - Distance-based charges:
    - Charge covering full external cost of driving estimated to yield over 2.6 percent of GDP in revenue in 2030 and road-transport emissions ~77 million tons (vs. 94 million tons under existing policies and 90 million tons for increased EV subsidies).
    - Feebate provides about a 0.1 percent of GDP fiscal benefit over current system.
    - Interim proxies: annual registration fees or prepayment varying with odometer readings and pollution, and tolling on congested roads.
    - Political/social sensitivities mitigated via income-based support and improved public transport accessibility.
- R&D and industrial policy:
  - Direct grants to battery manufacturing (example: €659 million to Verkor).
  - Investment tax credits of 20 to 45 percent of qualifying investments.
  - Cost-effective support should target market failures, be time-bound and transparent, and avoid local content requirements.

### Buildings: instruments, challenges, and costs
- Current instruments and budgets:
  - MaPrimeRénov’ budgeted at €4 billion in 2024 for renovations and low-carbon tech purchases; higher subsidies for low-income households and deeper renovations.
  - €0.5 billion for renovating public buildings.
  - Reduced VAT rate 5.5 percent for energy improvement works (estimated cost €1 billion in 2023).
  - RE2020 Environmental Regulation tightens construction material impact limits over time.
  - Renovation obligations for rented inefficient buildings; energy audit requirements; Energy Performance Certificate information provision.
  - Taxation of residential heating sources: natural gas 8.5 per MWh, heating oil 10.9 per MWh, propane 4.7 per MWh, electricity 32 per MWh (EC).
- Cost heterogeneity and market failures:
  - Abatement costs vary with renovation depth, pre-renovation EPC rating, and occupant socio-economics.
  - DG Tresor (2023): costs range from negative for renovations to B or C EPC when initial heating source is fuel oil, to over €1,500 per ton if renovations reach A rating and existing heat source is a heat pump or other electric device.
  - Market failures: information asymmetries, owner-tenant split incentives, credit constraints.
  - Supply chain inflexibilities and low-skill labor reliance require well-paced rollouts to avoid imbalances.

### Subsidies and feebates for decarbonization
- MaPrimeRénov’ has increased support for deeper renovations and comprehensive packages; continued fine-tuning of relative support levels necessary to target lowest-cost abatement while avoiding instability for households.
- Transaction and non-labor costs (noise, dust, vacancy) estimated equal to financing costs of renovation (DG Tresor 2023).
- Feebate options (three types):
  - Tax heating oil, LPG, natural gas proportional to carbon content to finance lower electricity taxes.
  - Lower property taxes for buildings with above-average EPCs; higher taxes for below-average EPCs.
  - Sliding scale of subsidies/taxes by appliance energy efficiency.
- Feebates can apply to capital appliances (e.g., refrigerators: kWh/cubic foot cooled metric) and be incorporated into MaPrimeRénov’.
- Application via property tax feasible if EPC robust and coverage sufficient; equity and political trade-offs exist (option: apply only to new transfers/newly built buildings).

### Climate transition risk and financial stability
- Transition and physical risks:
  - Transition risk arises from policy, technology, and market-sentiment shifts; physical risk from asset damage and higher insurance claims.
  - Financial institutions affected via increased default risk and lower asset values; insurers face asset- and liability-side risks.
- Financial exposure estimates:
  - ECB (2023) estimated potential exposure at risk in France ~5.87 trillion euros in expected annual financial assets exposure and corporate revenue losses.
  - BdF (2021) estimated insurance premium increases due to natural disasters of between 2.8 and 3.7 percent per year over next 30 years.
- Banking sector risk assessment under Fit-for-55:
  - Method: micro-macro approach linking ENVISAGE sectoral outputs to firm balance sheets and default probabilities, mapped to banks’ exposures.
  - Sector vulnerabilities: chemical and metals sectors show highest default probability; construction and metals highest default probability followed by transport and manufacturing.
  - Banking coverage: analysis of 9 largest French banks representing 90 percent of total banking assets.
  - Projected NPL increases by 2030:
    - Central Fit-for-55 transition scenario focused on energy-intensive sectors: NPLs projected to increase by about 1.5 percentage points by 2030.
    - More severe scenario with broader impacts: NPLs could increase by about 3 percentage points.
  - Caveat: mapping sectoral GVA to corporate balance sheets subject to approximation errors; assumption transition starts in 2023 may overestimate exposure.
- Comparisons:
  - BdF (2021) orderly scenario: cost of risk overall 1.2 times higher in 2050 vs. 2025 for all sectors; for energy-intensive sectors, cost of risk 2.5 times higher.
  - BdF disorderly scenarios: GDP loss could be between 2 and 5.5 percent (longer horizon); cost of risk 3 times higher for energy-intensive sectors in 2050.
  - ECB (2023) accelerated scenario: average percentage point increase in corporate PDs for Euro Area between 2022 and 2030 around 0.2 to 1.2 percentage points across risk quartiles, aligning with paper’s PD increases.
  - Median corporate loan portfolio PD increases range from 1.6 times to 2 times in 2030 for orderly and disorderly transitions, respectively.

### Conclusions and policy recommendations
- Timing and credit risk:
  - Timely and orderly transition critical to mitigate credit risk impact on banks and smooth adjustment/output costs for firms.
  - Climate transition under Fit-for-55 drives rising corporate PDs and banks’ NPLs, with estimated NPL increase about 1.5 percentage points by 2030 in central scenario.
- Supervisory, disclosure, governance:
  - Continue aligning with ECB supervisory expectations on climate/environment-related risks by 2024.
  - Enhance disclosure based on CSRD, EU Taxonomy, EBA Pillar 3 ESG rules to collect granular data, given concentration of energy-intensive corporates in bank portfolios.
  - ECB supervisors incorporating climate findings into SREP; SREP scores will influence Pillar 2 capital requirements and may require boosting capital where exposures are high.
  - Banks should accelerate remediation of shortcomings in internal governance and climate-risk management.
- Integrating transition plans and prudential framework:
  - Financial institutions should publish climate transition plans detailing how exposures to highly vulnerable firms will be reduced.
  - Revised Capital Requirements Directive encourages prudential plans; supervisors empowered to assess progress and require exposure reduction and reinforced targets.
  - Greater publication of reliable comparable data on banks’ exposures to energy-intensive firms and firms’ transition plans is needed.
- Carbon pricing and sectoral policy recommendations:
  - Raise carbon price for non-ETS sectors to comprehensively cover fossil fuel emissions and avoid delayed, costlier decarbonization in transport and buildings.
  - Couple non-ETS carbon price with a gradually increasing ETS price floor to equalize abatement costs.
  - Recycle carbon revenues to support vulnerable households (income-based cash transfers) while preserving price signals.
  - Use complementary sectoral policies where appropriate (e.g., feebates, targeted subsidies, public goods, R&D support) designed to mimic carbon pricing incentives and be income-targeted where necessary.
  - In transport: convert bonus/malus to linear feebate with revenue-neutral pivot and separate heavy-goods scheme to save ~0.1 percent of GDP and reduce sectoral emissions by 2 percent without increasing average vehicle price; consider distance-based charges for longer-term revenue and emissions objectives.
  - In buildings: continue MaPrimeRénov’ targeting, consider feebates and property-tax incentives tied to EPC where feasible, and re-balance relative energy taxes to incentivize switching to electricity-based heating.
- Analytical recommendation:
  - Continue to update and expand climate risk analysis using integrated top-down and bottom-up approaches; Banque de France should continue applying integrated assessments to ensure adequate capital and contingency planning.

*Source: "1. EU Climate Policies and Emission Targets" and related chapters from the provided IMF PDF chapter (sipea2024033).*

### 1. EU Climate Policies and Emission Targets ____________________________________________ 6

### 1. EU Climate Policies and Emission Targets

### EU-wide mitigation goals and mechanism
- The EU has committed to reducing emissions to 55 percent below 1990 levels by 2030 (“Fit-for-55”) and carbon neutrality by 2050.
- Annual emissions reductions need to increase from 1.2 percent (since 1990) to five percent through 2030 and continuing until net zero is reached.
- The European Commission is proposing an intermediate target of a 90 percent reduction by 2040.
- Existing and planned policies promote continued reductions, but stronger climate policies are needed to achieve targets; revised National Energy and Climate Plans are planned for mid-2024.

- The EU Emissions Trading System (ETS):
  - Covers large emissions sources from energy, industry, within-European Economic Area (EEA) aviation, waste, and maritime transport.
  - Currently covers about 38 percent of total EU GHGs (WBG 2023).
  - The volume of allowances allocated every year declines by 2.2 percent each year at present, increasing from January 1, 2024 to 4.3–4.4 percent annually to comply with the new “Fit-for-55” target.
  - By 2040, the volume of allowances allocated will be reduced to zero.
  - EU allowance prices rose to around €90 per tonne in 2021 but have fallen to about €70-75 per tonne more recently.
  - A separate ETS for road transportation, buildings, small industry and construction will be introduced in 2027; the allowance cap for this new ETS will be set to an annual, linear decline of five percent per year from 2024 emission levels.
  - Recommendation: revenues from the ETS should be spent on green measures, including to support vulnerable households and small businesses through the Social Climate Fund.

- Key EU directives and regulatory instruments mentioned:
  - Renewable Energy Directive (renewable energy targets, legally binding as of 2021).
  - Energy Efficiency Directive (binding energy consumption reductions).
  - Energy Taxation Directive (ETD) updates (minimum excise duties on energy products and electricity).
  - Energy Performance of Buildings Directive (long-term renovation strategies and minimum energy performance standards).
  - CO2 emissions performance standards for road transportation (progressively stricter; all new passenger vehicles and vans to be zero-carbon by 2035).

### France’s targets, recent progress, and projection under current policies
- France targets:
  - Economy-wide: -52% relative to 2005 by 2030.
  - Non-ETS sectors: -47.5% relative to 2005 by 2030.
  - ETS sectors (captioned in Table 1): -62% relative to 2005 by 2030-34% (table shows mixed entries; see below for sectoral targets).
- Emissions and sector shares (2022):
  - France accounts for 0.9 percent of global emissions.
  - Sectoral shares in 2022: Transportation 32 percent, Agriculture 19 percent, Industry 18 percent, Buildings 16 percent, Power generation 11 percent.
  - Since 2005, emissions have decreased by 23 percent.
  - Emissions reductions realized by sector since 2005: power generation, industry, and buildings falling by around 40 percent each; agriculture and transport by 10 percent.
- Projected trajectory under current/no additional policies:
  - By 2030, total emissions are estimated to decrease by 1 percent below 2022 levels (estimate from IMF’s Climate Policy Assessment Tool (CPAT)).
- NECP contribution and assessment:
  - Policies in France’s 2020 NECP are expected to contribute towards a 33.5 percent emissions reduction by 2030 relative to 2005 (48.1 percent for EU ETS and 28.7 percent for non-ETS sectors).
  - Based on the 2023 assessment by the European Environmental Agency and the European Commission, NECP policies do not fully close the gap to the 2030 targets.

- Table 1 excerpts (France: Mitigation Targets; assessment relative to 2005):
  - ETS sectors, emissions: Target -62% relative to 2005 by 2030-34% | CPAT: -29% | EEA: -48.1%
  - Power sector: Target -40% relative to 2005 by 2030-36% | CPAT: -35% | EEA: -56.2%
  - Industry: Target -68% relative to 2005 by 2030-33% | CPAT: -28% | EEA: -38.9%
  - Non-ETS sectors, emissions: Target -47.5% relative to 2005 by 2030-18% | CPAT: -24% | EEA: -28.7%
  - Transport: Target -41% relative to 2005 by 2030-11% | CPAT: -34% | EEA: -28.1%
  - Buildings: Target -75% relative to 2005 by 2030-28% | CPAT: -19% | EEA: -31.4%
  - Agriculture: Target -18% relative to 2005 by 2030-11% | CPAT: -10% | EEA: -6.5%
  - Waste: Target -24% | CPAT: -26%
  - Economy-wide: Target -52% relative to 2005 by 2030 | 2021–2030 assessment: -22% | CPAT: -23% | EEA: -33.5%
  - Power, renewable share: At least 33% by 2030; 50% of power production with nuclear energy by 2035 | 24.8% | CPAT: 33.6%

### Key findings and policy implications highlighted in the unit
- The EU Fit-for-55 framework requires materially faster emission reductions than historical rates; implementation instruments (ETS tightening, new sectoral ETS, directives) are central to meeting legally binding targets.
- France has made significant progress but needs additional policy efforts to meet key mitigation targets, especially in buildings, transportation, and heavy industry—sectors with higher abatement costs.
- Under current policies, France’s projected 2030 emissions trajectory falls short of national and EU targets (CPAT projection: total emissions -1 percent below 2022 by 2030).
- Carbon pricing and the strengthened ETS are important levers; revenues should be recycled to support vulnerable households and small businesses and to finance green measures.
- Complementary national measures (environmental taxes and subsidies, standards, regulations, direct investment) will remain necessary alongside ETS reforms to close the gap.
- The EU-wide introduction of an ETS for road transport, buildings, small industry, and construction (from 2027) is a major policy shift that will affect non-ETS sectors at national level; its cap trajectory is a linear decline of five percent per year from 2024 emission levels.

*Source: "1. EU Climate Policies and Emission Targets" (selected content from the provided IMF PDF chapter).*

### 11.      Power generation, buildings, and

### 11.      Power generation, buildings, and

### Climate vulnerabilities and sectoral exposure
- Power generation, buildings, and agriculture assets are most exposed to rising temperatures and higher risk of extreme rainfall and prolonged droughts.
- Prolonged droughts and water scarcity can reduce hydroelectricity and electricity output from nuclear power (63 percent of France’s electricity production in 2022).
- Rising river water temperatures can cause temporary shutdowns and impact the cooling of nuclear reactors located on the banks of rivers and seaside (56 reactors).
- Heat stress can reduce labor productivity and impact tourism flows.
- The building sector is highly vulnerable to river floods and heatwaves, increasing requirements for building-based damage reduction measures, passive indoor cooling and in some cases active solutions.
- The average amount of insurance claims in the building sector for natural disasters is expected to reach €4.6 billion per year from 2020 to 2050 (France Stratégie).

### Projected damages from droughts, floods, and heatwaves
- The damage from droughts costs power generation and agricultural assets about €2.8 billion per year.
- Higher volatility of agricultural production can affect food security in France more than peers (Global Food Security Index).
- Droughts Annual Damage Projection by Asset presents Total damage across: Agriculture, Power generation, Water supply, Building, Shipping (figures in the source visualizations not reproduced here).

### Macroeconomic implications of the green transition
- The macroeconomic effects of climate mitigation policies are difficult to assess; results differ by modelling approach:
  - Keynesian models (aggregate investment increasing in the green transition) often show positive impacts on economic activity or employment.
  - Neoclassical models (carbon pricing or regulations reduce allocation efficiency and/or green investments crowd out more productive investments) usually find negative but moderate activity losses.
- Pisani-Ferry and Mahfouz (2023) estimate that the transition will require substantial investment of around €63-66 billion (about 2.8 percent of GDP) per year between now and 2030 from both the public and private sectors.
- Pisani-Ferry and Mahfouz simulate that potential GDP could decline by 1.5–2 percentage points by 2030, assuming a transitory reduction in productivity growth by 0.25–0.3 percentage point over the next years, and a decline in actual GDP of roughly 1 percentage point.

### ENVISAGE CGE model: approach and limitations
- Model used: ENVISAGE by Van den Mensbrugghe (2024), a recursive-dynamic, multi-regional, multi-sectoral CGE model in a neo-classical framework.
- Coverage: 24 countries and regions and 36 distinct sectors.
- Model features:
  - Optimizes consumption and production decisions by households and firms.
  - Simulates impacts on energy demand and supply, GHG, macroeconomic variables, sectoral outcomes, and trade.
- Limitation: Does not account for adjustment costs when factors of production reallocate across economic activities; not well suited to analyze short-term dynamics nor transition paths.

### Fit-for-55 (FF55) scenario calibration and assumptions
- Global scenario assumptions:
  - Carbon price in the current EU-ETS and UK ETS increases to $185 per ton in 2030.
  - Three additional policies: increase use of heat pumps; regulations for energy efficiency improvements in transportation and buildings; easing of permits for investments in renewable energy.
- Calibration details:
  - Costs of regulations for energy efficiency improvements in transportation and buildings: 5.8 percent of gross annual fixed investment in each European country.
  - Increased use of heat pumps reduces household energy demand by 11 percent; associated costs calibrated to be 0.6 percent of gross annual fixed investment.
  - Easing of permits assumed to increase total factor productivity of wind and solar power, leading to 10 percent more renewable generation compared to baseline values in 2030.
  - These four policies calibrated to reach the 55 percent emission reduction target by 2030 relative to 1990.
  - Only the EU, UK and EFTA achieve their NDC targets; rest of the world has no mitigation policies.
- Revenue recycling assumptions: two policies considered
  - i) revenues recycled via a reduction of labor taxes;
  - ii) revenues recycled via cash transfers to households.

### FF55 scenario results and sectoral impacts
- Energy mix in France in 2030 under FF55:
  - No energy powered by coal or oil; lower gas and nuclear power; higher wind generation.
- Real GDP impacts by 2030 relative to baseline:
  - If revenues recycled via reduction of labor taxes: Real GDP could be 1.3 percent lower relative to the baseline by 2030.
  - If revenues recycled via cash transfers to households (budget neutral): Real GDP could be 1.6 percent lower relative to the baseline by 2030.
  - Interpretation: Labor tax reductions are a more efficient recycling method than cash transfers.
- Most affected sectors: energy-intensive sectors such as mining, oil & gas, manufacturing, chemicals, and utilities (coal, gas, and oil).
- Abatement costs: implicitly determined by energy-intensity and substitution possibilities; lower abatement costs for the energy sector (given renewable electricity generation) and higher abatement costs for agriculture, transport, and industrial processes.

### Carbon pricing in France: current status and comparisons
- France’s explicit carbon contribution (Contribution Climat-Énergie or CCE) currently equals €44.6/tCO2 and covers mainly heating, transport, and non-ETS 1 industry.
- Excises on fuels:
  - Unleaded petrol: €291 per tonne of CO2 (when used for transportation).
  - Diesel (transport): €196 per tonne of CO2 (when used for transportation).
  - Reduced excise rates for other diesel uses (heating and non-transportation commercial activities).
- Effective carbon pricing coverage and levels:
  - OECD estimates 71 percent of GHG emissions in France were covered by net positive effective pricing, for a total average level of €83/tCO2 eq.
  - OECD average: 53 percent coverage, average pricing level of €34/tCO2 eq.
  - French Ministry of Energy Transition reports the average level of effective carbon price in France linked to energy combustion was €104/tCO2 in 2022.
- Sectoral notes:
  - Road transportation carbon prices are in line with EU or advanced EU averages, but below some neighboring countries and below levels needed to meet emissions-reduction targets under current policy trends.
  - Industry carbon prices are slightly lower than EU peers due to low natural gas, coal, and diesel excise rates and around 16 percent of industrial sector emissions not covered by ETS 1.
  - Carbon prices for buildings are slightly higher than EU peers.
  - Agriculture effective carbon price rates remain significantly lower (driven by non-road diesel implicitly subsidized).
- Upcoming EU-level change: a new ETS for road transportation, buildings, small industry and construction will be introduced in 2027.

### Rationale for raising carbon pricing in non-ETS 1 sectors
- Advantages of carbon pricing:
  - Provides across-the-board incentives to reduce energy consumption and shift to cleaner fuels by reflecting carbon costs in fuel, electricity, and goods prices.
  - Minimizes mitigation costs by equalizing the cost of the last ton of emissions reduced across fuels and sectors when the same price is used economy-wide.
  - Mobilizes revenues and generates domestic environmental co-benefits (e.g., reductions in local air pollution mortality).
  - Administratively straightforward and can build on existing excise tax system.
- European context:
  - Prices for non-ETS 1 sectors in several European countries vary from €35 to €110 per ton.
  - France’s carbon pricing is comparable to other advanced EU economies, though France has postponed increasing its price.

### CPAT illustrative $100 per ton non-ETS 1 carbon price scenario
- Method: Climate Policy Assessment Tool (CPAT) used to estimate impacts on energy consumption, prices, emissions, local air pollutants, revenues, and welfare; distributional module used for consumption losses across deciles and firm input costs.
- Scenario: Additional carbon price progressively reaching $100 per ton on non-ETS 1 sectors.
- Projected impacts relative to Business-as-Usual (BAU):
  - Non-ETS 1 emissions reduced by nearly 10 percent below BAU.
  - Economic efficiency costs: 0.3 percent of GDP (deadweight losses in fuel markets from changes in fuel prices, not accounting for revenue recycling benefits or tax interaction effects).
  - Welfare benefits from reduced air pollution and other co-benefits: 0.1 percent of GDP (benefits from reduced air pollution net of losses to consumer welfare caused by higher taxes).
  - The carbon price would mobilize additional revenues (exact revenue figure referenced in source visualizations; textual summary states it would mobilize revenues).
- BAU definition: only considers existing fiscal policies and does not consider the planned EU ETS for transportation and buildings nor regional renovation obligations.

*Source: IMF staff estimates and analysis as presented in the chapter "11.      Power generation, buildings, and" from the provided IMF document.*

### 0.8 percent of GDP, which could be recycled via cash transfers to offset the price impact on lower-

### sipea2024033 - 0.8 percent of GDP, which could be recycled via cash transfers to offset the price impact on lower-

### Efficiency of energy prices and carbon pricing design
- An economically efficient (first-best) fuel pricing regime includes:
  - full passthrough of commodity supply costs (labor, capital, and raw materials)
  - a carbon price equal to the damage from CO2 emissions (or in line with meeting emissions reduction targets)
  - an excise equal to the cost of local externalities caused by fossil fuel combustion
  - the standard VAT rate
- Transitioning from a gradually increasing non-ETS carbon price to a domestic price floor for the EU ETS would help achieve efficient fuel price levels and equalization of abatement costs across the economy.
- A carbon price of $100 by 2030 on non-ETS activities could be applied as a price floor for the ETS to achieve fully efficient pricing of externalities.
- Energy-intensive firms would see a 1–5 percent increase in input costs due to higher energy prices.

### Distributional impact of higher carbon pricing and revenue recycling
- Under a $100 per ton carbon price:
  - Loss in purchasing power of poorer households (four lowest income deciles) is estimated at 1.5 percent of total consumption (slightly higher at 1.6 percent for households in the fourth decile).
  - Losses are higher for rural vs. urban households by about 0.5 percent across all income deciles.
- The current national minimum wage system automatically protects low-income households using electricity, fuel and/or natural gas for heating through indexation as higher energy taxes increase inflation.
- Fiscal revenue and recycling:
  - Total fossil fuel excise taxes would amount to 3.5 percent of GDP in 2030.
  - Additional revenue from the $100 per ton carbon price under the CPAT simulation equals 0.8 percent of GDP (around 22 percent of total carbon pricing revenue).
  - All additional revenue (0.8 percent of GDP) could be used to fully compensate households in the bottom four income deciles, or more broadly across the income distribution, for their losses without overcompensating them.
- Policy recommendation on support:
  - Provide income-based measures (e.g., cash transfers) to vulnerable households to preserve price signals and allow optimal household allocation decisions.
  - Support should not be conditional on household or firm energy expenditure because conditionality effectively subsidizes energy inefficiency and raises the cost of investing in emissions reductions.

### Role and design of sectoral mitigation policies
- Sectoral policies complement carbon pricing and can help balance fiscal, economic, equity, and acceptability objectives.
- Cost-effective sectoral policies should mimic advantages of carbon pricing (create similar incentive levels across abatement responses), and can:
  - condition subsidies on household income to address affordability
  - provide public goods (e.g., public transportation)
  - promote positive externalities from R&D in green technology
  - promote domestic competitiveness and protect against carbon leakage
- France has existing sectoral decarbonization policies in buildings, transportation, industry, and power; scope exists to increase effectiveness while limiting fiscal costs, with focus on buildings and transport.

### Transportation: current policies, projections, and reform options
- Current spending and instruments:
  - Direct spending on rail, river, and right-of-way public road transport planned to exceed €4 billion in France in 2024.
  - €1.3 billion budgeted for the ecological bonus (subsidizes purchase of electric passenger vehicles by up to €7,000, varying by buyer income and vehicle purchase price).
  - Ecological malus provided taxes on vehicles by emissions-intensity and weight (€0.8 billion in 2023).
  - Excises apply to road transportation fuels at rates of €0.59 and 0.68 per liter of diesel and petrol and €32 per megawatt hour of electricity, plus VAT at the standard rate of 20 percent.
  - Heavy goods receive a partial rebate on diesel excises.
  - As of 2024, all EV subsidies are conditional on the emissions-intensity of production, excluding about 35 percent of EVs sold in the French market that were previously eligible.
- Emissions and revenue trajectory under existing policies:
  - Road transportation emissions begin to fall in 2024, reaching 94 million tons in 2030 and 66 million tons in 2035.
  - Proposed carbon budget of 75 million tons from 2029 to 2033 (2023 Draft NECP); SGPE provisional target of 81 million tons in 2030 (SGPE 2023).
  - Electricity demand from road transportation projected to grow from 4 terawatt hours (TWh) in 2023 to 31 TWh in 2030; total national electricity use around 450 TWh in 2023.
  - Fiscal revenue expected to decline from around 1.4 percent of GDP to close to 1 percent by 2029 as electrification progresses.
- Reform options and impacts:
  - Converting the bonus/malus system to a linear feebate:
    - Would provide continuous incentives to purchase less emissions-intensity vehicles.
    - Can be designed to be approximately revenue neutral by setting the pivot point slightly below the level that results in revenue neutrality based on the previous year’s sales.
    - Would reduce incentives for fuel efficient ICEVs or plug-in hybrids under current discontinuous regime; maintaining a means-tested subsidy could address equity.
    - A similar linear scheme could be applied to heavy goods vehicles with sector-specific pivot points and annual levies.
  - Distance-based (efficient) charges:
    - A charge covering the fully external cost of driving is estimated to result in revenue of over 2.6 percent of GDP in 2030 and road transportation emissions of about 77 million tons (vs. 94 million tons under existing policies and 90 million tons for increased EV subsidies).
    - Policies that do not increase the cost of driving fail to maintain revenue at current levels; a feebate provides about a 0.1 percent of GDP fiscal benefit over the current system.
    - Preparing administrative capacity and economic analysis to introduce distance-based charges is needed; interim proxies include annual registration fees or prepayment varying with odometer readings and pollution characteristics, and tolling on congested roads.
    - Manage political and social sensitivities via income-based support, promoting public transportation accessibility, and potentially transit subsidies for vulnerable households.
- R&D and industrial policy:
  - France supports battery manufacturing through direct grants (e.g., €659 million to Verkor) and green investments via investment tax credits of 20 to 45 percent of qualifying investments.
  - Cost-effective support should target market failures, focus on nascent technologies, complement core decarbonization policies, be time-bound and transparent, and be consistent with WTO obligations (avoid local content requirements).
  - Consider competitive grant designs (e.g., Netherlands SDE++) that allocate grants to bidders with lowest abatement costs.

### Buildings: instruments, challenges, and costs
- Current instruments and budgets:
  - MaPrimeRénov’ subsidy scheme budgeted at €4 billion in 2024 for energy-efficient renovations and purchase of low carbon technologies (e.g., heat pumps); higher subsidy levels for low-income households and deeper renovations.
  - Additional €0.5 billion for renovating public buildings.
  - Reduced VAT rate of 5.5 percent for energy improvement works (estimated cost €1 billion in 2023).
  - RE2020 Environmental Regulation sets limits on environmental impact of construction materials and tightens over time.
  - Renovation obligations for rented energy inefficient buildings, energy audit requirements, and Energy Performance Certificate information provision.
  - Taxation of residential heating sources: natural gas 8.5 per MWh, heating oil 10.9 per MWh, propane 4.7 per MWh, and electricity 32 per MWh (EC).
- Decarbonization challenges and cost heterogeneity:
  - Abatement costs vary with depth of renovation, a building’s pre-renovation energy efficiency (EPC), and occupant socio-economics.
  - DG Tresor (2023) shows costs vary from negative for renovations B or C EPC rating with initial heating sources being fuel oil to over €1,500 per ton if renovations reach A rating and the existing heat source is a heat pump or other electric device.
  - Market failures include information asymmetries, mismatched owner-tenant incentives, and credit constraints.
  - Supply chain inflexibilities and reliance on low-skill labor necessitate well-paced renovation rollouts to avoid supply and demand imbalances and meet 2030 and 2050 targets.

*Source: IMF staff estimates and analysis as presented in the SIP content.*

### 33.      The cost-efficiency of subsidies to decarbonization should be studied, through their

### sipea2024033 - 33.      The cost-efficiency of subsidies to decarbonization should be studied, through their

### Cost-efficiency of subsidies to decarbonization
- Subsidies under MaPrimeRénov’ have increased for deeper renovations and comprehensive reform packages, promoting renovations and capital good purchases that provide with the lowest abatement costs and are in line with long-term and deep decarbonization objectives and coherent with the other public policy goals like health, household purchasing power, energy independence (DG Tresor (2023)).
- Continued fine-tuning of the relative support levels across abatement responses may be necessary to ensure that incentives target the lowest cost remaining abatement actions, but subsequent changes need to be weighed against the uncertainty that frequently changing policy presents for households.
- Transaction and non-labor costs (noise, dust, vacancy) are estimated to be equal to the financing costs of renovation (DG Tresor 2023).

### Feebates and revenue-neutral complements in the building sector
- Three types of feebates could be considered in France; they can be applied in tandem or in isolation:
  - A tax on heating oil, LPG, and natural gas proportional to their carbon content could finance lower electricity taxes.
  - Lower property taxes for buildings with above average EPCs and higher taxes for those with below-average EPCs.
  - A sliding scale of subsidies and taxes according to appliances energy efficiency.
- Feebates could apply to capital appliances, such as refrigerators and heating/cooling systems:
  - Example metric for refrigerators: energy consumption per unit would be kWh/cubic foot cooled (and the number of units would be cubic feet).
  - Other potential capital goods include washing machines and cooling systems.
  - Formula example provided: {CO2 price} × {CO2 per unit of energy} × {energy consumption per unit—industry-wide energy consumption per unit} × {number of units}.
- Feebates could be incorporated into MaPrimeRénov’.
- Applying feebates via the property tax system:
  - Practical if EPC is a robust indicator of emissions-intensity and enough buildings have EPCs.
  - Applying through property tax (rather than transfer tax) would cover more properties but raises equity and political considerations because it would affect occupants who made purchase decisions before policy introduction.
  - One option: apply only to new transfers and newly built buildings, with the trade-off of potentially discouraging sales of poorly insulated houses.

### Relative prices and incentives for switching fuels
- Electricity is currently around twice as expensive as natural gas and 1.5 times the price of heating oil per unit of energy, partly due to disproportionately high tax rates on electricity (around three, four, and eight times higher than that of heating oil, natural gas, and propane).
- Compared to other EU countries, the relative price of natural gas in France is somewhat low but still above those that have progressed quickly in decarbonizing the building sector (e.g., Sweden); heating oil and LPG prices are below comparators for households but average-to-high for industry.
- Policy proposal: reduce taxes on electricity used for heating financed by higher taxes on natural gas, heating oil, and propane to incentivize switching to electricity-based heating.

### Conclusions on carbon pricing and sectoral policies
- An effective carbon pricing strategy should:
  - Cover emissions comprehensively.
  - Establish predictable prices.
  - Align stringency with mitigation goals.
  - Exploit fiscal opportunities.
- Further raising the carbon price for non-ETS sectors would ensure fossil fuel emissions in France are comprehensively covered by pricing schemes and help avoid delayed, more costly decarbonization in transportation and buildings.
- Coupling the non-ETS carbon price with a gradually increasing ETS price floor would equalize abatement costs across the economy and ensure efficiency in emissions reductions.
- A higher domestic non-ETS carbon price could act as a price floor for the future EU-wide ETS in 2027/28.
- Carbon pricing would raise revenue that can be used to support vulnerable households; transparent communication and consultation on distributional impacts and revenue recycling are critical for political acceptability.
- Complementary sectoral policy example for vehicles:
  - Converting the bonus/malus for vehicles to a linear schedule with a pivot point set to be revenue neutral, plus a separate bonus/malus for heavy goods, would save around 0.1 percent of GDP and reduce sectoral emissions by two percent without increasing prices for the average vehicle purchase.
  - Deeper reforms (e.g., transition to distance-based charges applied through annual registration fees or real-time charges) would be needed to meet transportation carbon budgets and maintain road-transportation revenue as the fleet electrifies.

### Climate transition risk and financial stability — overview
- Transition to a low-carbon economy generates transition risk through changes in climate policy, technology, and market sentiment; physical risk arises from damage to assets and higher insurance claims.
- Financial institutions can be affected via increased default risk of loan portfolios and lower asset values; insurers face asset-side and liability-side risks.
- The analysis focuses on transition risk; physical risks are acknowledged as significant but difficult to predict and calibrate.
- Literature and institutional findings:
  - Battiston, Dafermos, & Monasterolo (2021): climate events typically reduce insurers’ profitability, bank stability, market returns, and international investment.
  - ECB/EBRD (2023): climate risk endogeneity challenges traditional macroeconomic and financial risk analysis.
  - Banque de France (2021) and ECB (2023) use general equilibrium or micro-founded firm-level models to assess impacts on corporate balance sheets and financial institutions.

### Financial exposure to physical risks (box summary)
- ECB (2023) estimated financial institutions’ potential exposure at risk in France at around 5.87 trillion euros in terms of expected annual financial assets exposure and corporate revenue losses.
- BdF (2021) estimated an increase in insurance premiums due to natural disasters of between 2.8 and 3.7 percent per year over the next 30 years.

### Risk assessment of the French banking sector under a Fit-for-55 scenario
- Method: micro-macro approach using the ENVISAGE model to simulate the Fit-for-55 climate scenario; sectoral output paths from ENVISAGE are integrated into firm-level balance sheets and probabilities of default, then mapped to banks’ exposures.
- Caveat: mapping sectoral GVA from the macro model into sectoral corporate balance sheets and banks’ exposures is subject to approximation errors due to differing sector classifications.
- Sector vulnerabilities and default probabilities:
  - Chemical and metals sectors show the highest default probability in the integration of sectoral output paths into firm-level balance sheets.
  - Construction and metals sectors show the highest default probability, followed by transport and manufacturing.
  - Drivers: higher emission profiles, lower profits, and higher leverage increase sensitivity to shocks.
  - Moody’s EDF in 2022 tailored to France used as the proxy for initial PD.
- Banking sector exposure and projected non-performing loans:
  - Analysis covers the 9 largest French banks which represent 90 percent of total banking assets.
  - NPLs are projected to increase by about 1.5 percentage points by 2030 under the Fit-for-55 transition central scenario focused on energy-intensive sectors (chemicals, metals, and other sensitive manufacturing).
  - In a more severe scenario with broader impacts across all sectors of interest, NPLs could increase by about 3 percentage points.
  - The analysis assumes the transition starts in 2023, which may overestimate risk exposure due to data limitations on sectoral transition progress.
- Comparisons with prior studies:
  - BdF (2021) orderly scenario (less stringent than Fit-for-55, longer horizon): cost of risk overall 1.2 times higher in 2050 compared to 2025 for all sectors; for energy-intensive sectors, cost of risk is 2.5 times as high.
  - BdF disorderly scenarios: GDP loss could be between 2 and 5.5 percent (over a longer horizon); cost of risk is 3 times higher for energy-intensive sectors in 2050.
  - ECB (2023) accelerated scenario (closest to this paper): average percentage point increase in corporate PDs for the Euro Area between 2022 and 2030 would be around 0.2 and 1.2 percentage points for the lower and upper risk quartiles, aligning with the paper’s PD increase estimates.
  - Median corporate loan portfolio PD increases range from 1.6 times to 2 times in 2030 for orderly and disorderly transition, respectively.

*Source: IMF staff estimates and analysis in the selected issues paper excerpt.*

### Conclusions

### Conclusions

### Climate transition timing and bank credit risk
- The chapter employs a top-down climate risk assessment building on existing literature, including exercises by BdF, ECB, and recent IMF FSAPs.
- Findings:
  - Results point to rising corporate PDs and, in turn, banks’ NPLs in the energy-intensive sectors.
  - Increase of about 1.5 percentage points by 2030 under the Fit-for-55 transition scenario.
- Policy implication:
  - Ensuring a timely and orderly transition is critical to mitigate the credit risk impact on banks and to smooth adjustment and output costs for firms.
- Analytical recommendation:
  - Continue to update and expand climate risk analysis.
  - The Banque de France should continue applying integrated climate risk assessment frameworks to update the impact of climate transition risk on financial stability to ensure adequate capital and contingency planning.
  - Combining bottom-up and top-down approaches would provide the most accurate assessments of risk.

### Supervisory alignment, disclosure, and governance
- Ongoing efforts aim to reach full alignment with ECB supervisory expectations on climate and environment-related risks by 2024.
- Disclosure and reporting requirements:
  - Banks would need to publish information based on the Corporate Sustainability Reporting Standards (CSRD), the EU Taxonomy regulatory requirements, and the EBA’s Pillar 3 rules and ESG risks reporting and disclosures.
  - Given sizable concentration of energy-intensive corporates in the banking sector portfolio, disclosure should be enhanced to collect granular data.
- Supervisory actions and capital implications:
  - ECB supervisors are including bank-specific climate findings in their Supervisory Review and Evaluation Process (SREP), and imposing binding qualitative requirements to 30 banks (some of which in France too) in their annual SREP.
  - SREP scores will impact banks’ Pillar 2 capital requirements which will need to be boosted if banks’ exposures to energy-intensive corporates are high.
- Bank-level recommendation:
  - Banks need to accelerate the effective remediation of shortcomings in internal governance and the management of climate-related risks.

### Integrating transition plans into the prudential framework
- Recommendation for financial institutions:
  - Banks and other financial institutions should publish climate transition plans detailing how they plan to reduce their exposure to firms highly vulnerable to climate-related risks, including policy and regulatory changes.
- Regulatory context:
  - The revised Capital Requirements Directive encourages banks to prepare prudential plans to address climate-related risks.
  - Supervisors are empowered to assess banks’ progress in addressing those risks and to require banks to reduce their exposure to these risks and to reinforce targets.
- Data and transparency needs:
  - Greater efforts are needed in France to publish reliable and comparable data on exposures of banks to energy-intensive firms and on firms’ and banks’ transition plans.

*Source: Conclusions, sipea2024033 - Conclusions*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024033.pdf_