Climate-Related Stress Testing: Transition Risks in Norway
IMF Working Papers, November 8, 2020
Source details
- Canonical URL
- Climate-Related Stress Testing: Transition Risks in Norway
Other formats
Bibliographic details
- Authors: Pierpaolo Grippa, Samuel Mann
- Published: November 8, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513559674.001
Summary
- Paper explores three transmission channels for transition risk shocks to Norway’s financial system.
- Key conclusions:
- A sharp increase in carbon prices would have a significant but manageable impact on banks.
- The paper discusses ways to advance the still evolving field of transition risk stress testing.
Transmission channels analyzed
- Direct firm-level impact of a substantial increase in domestic carbon prices under severe assumptions.
- Impact of a drastic increase in global carbon prices on the domestic economy via the Norwegian oil sector.
- Impact of a forced reduction in Norwegian oil firms’ output on shareholder portfolios.
Methods and analytical focus
- Firm-level estimation of direct impacts from domestic carbon price shocks.
- Mapping of macroeconomic transmission through the oil sector from global carbon price shocks.
- Portfolio-level modeling of forced output reductions in Norwegian oil firms and consequent effects on shareholders.
Findings and implications for financial stability
- Results show that a sharp increase in carbon prices:
- Would have a significant impact on banks.
- The impact is characterized as manageable for the banking sector.
- Emphasis on the evolving nature of transition risk stress testing and the need for methodological advances.
Policy and research recommendations
- Advance the field of transition risk stress testing (specific pathways and techniques discussed in the paper).
- Incorporate firm-level, sectoral (oil sector), and portfolio channels in stress-testing frameworks to capture transition risks comprehensively.
Content in this bundle
- Working Paper