Financial instability, asset stranding and the low-carbon transition - A scenario-based stock-flow consistent approach

The Institute of Economics will hold a seminar meeting as part of its Seminar Series on Tuesday, May 23, 2023: Louis Daumas from Centre International de Recherche en Environnement et Développement (CIRED) will present the paper "Financial instability, asset stranding and the low-carbon transition - A scenario-based stock-flow consistent approach".

Abstract:

This paper analyses how financial instability can emerge due to technological displacement and asset stranding along mitigation pathways limiting global warming to 1.5°C or 2°C. It develops a stock-flow consistent model for the study of transition risks with an embedded financial system with bank and non-bank financial agents and contagion mechanisms across both agent types. The model also includes an explicit representation of asset stranding as the decommissioning of excess high-carbon capital, and a representation of the transition as sweeping structural change rather. The framework is used to emulate decarbonisation pathways and carbon price paths embedded in scenarios provided by the Network for Greening the Financial System (NGFS). The model follows the literature in showing that more climate-ambitious and more technically constrained scenarios yield higher transition risks. It further shows that distinct types of financial institutions are not equally affected by different transition scenarios. For instance, banks are much less affected in delayed-action scenarios than non-bank institutions? Further, non-bank institutions drive transition risks most. The model also illustrates the importance of accounting for the reaction of the financial sector along decarbonisation scenarios. Finally, by studying decarbonisation pathways from various integrated assessment frameworks, I show the necessity to consider a wide array of scenarios generated by different models. The presentation will also, if time allows, touch upon an extension of this approach to a larger set of scenarios.

The Seminar will be held in Aula 3.

For online participation, please use this link.