IMF Working Papers

We present the ENV-FIBA macro-micro model framework that can be used to analyze the climate-macro-financial consequences of climate scenarios and related policy counterfactuals. The model consists of a multi-country Computable General Equilibrium (CGE) core and a connected micro simulation module for an economy’s individual nonfinancial firms and banks. The climate-macro-financial scenario simulations are anchored in future temperature and emission pathways, alongside policy assumptions regarding carbon taxation, fiscal revenue recycling and reinvestment, optional carbon border adjustment mechanisms, and others. We illustrate the use of the model for Japan. We emphasize, exemplify with the model, and recommend in general: (1) that physical and transition risk effects be modeled jointly to a maximal extent (given their intertwined nature); (2) that it is important to consider bank balance sheets that are dynamic (not static), to capture the differential growth of emmission intensive industries that may shrink, opposed to those that may flourish; and (3) related to the latter, that such dynamically evolving lending has primary impacts on bank solvency via interest income, along with quantitatively often smaller impacts through loan losses from borrower defaults.