Climate Transition Risk and Financial Stability in France

IMF Working Papers, July 12, 2024

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Authors: Rachel Lee, Hugo Rojas-Romagosa, Iulia Ruxandra Teodoru, Xiaoxiao Zhang
Published: July 12, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400280696.001

Empirical investigation using a micro-macro approach to examine long-term effects of climate mitigation and decarbonization policies on sectoral output, firm profitability, and likelihood of corporate defaults.
Modeling tools and data integration:
- Recursive-dynamic, multi-regional, multi-sectoral computable general equilibrium (CGE) model used to simulate the Fit-for-55 climate scenario.
- Sectoral output paths from the CGE model are integrated into firm-level corporate balance sheets and risk metrics.
- Assessment of banks’ credit exposure to energy-intensive sectors.

Under the Fit-for-55 scenario:
- The mining sector might face notable increases in its probability of defaults.
- The chemicals sector might face notable increases in its probability of defaults.
- The manufacturing sector might face notable increases in its probability of defaults.
These sectoral increases in default probability could create pockets of vulnerabilities in some parts of the banking system, depending on banks’ exposure to the identified energy-intensive sectors.

Highlights the importance of a timely and orderly transition to limit concentrated financial-sector risks.
Recommends integrating climate transition plans into the prudential framework to address potential pockets of vulnerability stemming from exposure to energy-intensive sectors.