## Climate-Related Stress Testing: Transition Risk in Colombia

_IMF Working Papers, November 5, 2021_

## Source details

**Canonical URL:** [Climate-Related Stress Testing: Transition Risk in Colombia](https://www.imf.org/en/publications/wp/issues/2021/11/05/climate-related-stress-testing-transition-risk-in-colombia-504344)

## Other formats

- [Markdown version](/en/publications/wp/issues/2021/11/05/climate-related-stress-testing-transition-risk-in-colombia-504344/index.md)
- [Structured JSON version](/en/publications/wp/issues/2021/11/05/climate-related-stress-testing-transition-risk-in-colombia-504344/index.json)
- [Bundle manifest](/en/publications/wp/issues/2021/11/05/climate-related-stress-testing-transition-risk-in-colombia-504344/bundle-manifest.json)

## Bibliographic details
- Authors: Can Sever, Manuel Perez-Archila
- Published: November 5, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513599205.001

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### Framework and scope
- Builds a framework to quantify the financial stability implications of climate-related transition risk in Colombia.
- Explores risks imposed on the banking system based on scenarios of an increase in the domestic carbon tax.
- Uses bank- and firm-level data.
- Focuses on the deterioration of firms’ balance sheets and the exposure of banks to different sectors to assess transmission from nonfinancial firms to the banking system.

### Key findings
- Sectors are affected unevenly by a higher carbon tax.
- The following sectors appear to be the most important in the transmission of the risk to the banking system:
  - Agriculture
  - Manufacturing
  - Electricity
  - Wholesale and retail trade
  - Transportation
- A large increase in the carbon tax can generate significant but likely manageable financial stability risks.
- 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 allow for a smoother adjustment to higher carbon tax for stakeholders.

### Policy implications and recommendations
- Consider gradual implementation of higher carbon tax targets spread over several years to reduce near-term financial stability risks.
- Monitor sectoral exposures in banks, giving attention to agriculture, manufacturing, electricity, wholesale and retail trade, and transportation.
- Use bank- and firm-level data to assess potential deterioration in firms’ balance sheets and the consequent transmission to the banking system.

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## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2021/english/wpiea2021261-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2021/english/wpiea2021261-print-pdf.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2021/11/05/climate-related-stress-testing-transition-risk-in-colombia-504344_