Climate-Related Stress Testing: Transition Risk in Colombia

November 5, 2021

Preview Citation

Format: Chicago

Can Sever, and Manuel Perez-Archila. Climate-Related Stress Testing: Transition Risk in Colombia, (USA: International Monetary Fund, 2021) accessed September 18, 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 paper builds a framework to quantify the financial stability implications of climate-related transition risk in Colombia. We explore risks imposed on the banking system based on scenarios of an increase in the domestic carbon tax by using bank- and firm-level data. Focusing on the deterioration of firms’ balance sheets and the exposure of banks to different sectors, we assess the extent to which such policy shock would transmit from nonfinancial firms to the banking system. We observe that sectors are affected unevenly by a higher carbon tax. Agriculture, manufacturing, electricity, wholesale and retail trade, and transportation sectors appear to be the most important in the transmission of the risk to the banking system. Results also suggest that a large increase in the carbon tax can generate significant but likely manageable financial stability risks, and that a gradual increase in the carbon tax to meet a higher target over several years could be preferable in terms of financial risks. A gradual increase would also have the benefit of allowing for a smoother adjustment to higher carbon tax for stakeholders.

Subject: Carbon tax, Commercial banks, Environment, Financial institutions, Greenhouse gas emissions, Loans, Taxes

Keywords: Banking stress, Carbon emission, Carbon tax, Carbon tax, Caribbean, Climate change, Climate crisis, Colombia, Commercial banks, D. banking data, Environmental taxes, Financial stability, Global, Green economy, Greenhouse gas emissions, Loans, Nonfinancial firm, Risk to the banking system, Stress testing, Transition risk

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/261
Stock No:

WPIEA2021261
ISBN:

9781513599205
ISSN:

1018-5941

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