Low‐carbon transition risks for finance

Semieniuk, Gregor ORCID: https://orcid.org/0000-0002-2747-595X and Campiglio, Emanuele and Mercure, Jean-Francois ORCID: https://orcid.org/0000-0003-2620-9200 and Volz, Ulrich ORCID: https://orcid.org/0000-0001-9917-8068 and Edwards, Neil R. ORCID: https://orcid.org/0000-0001-6045-8804 (2020) Low‐carbon transition risks for finance. WIREs Climate Change. ISSN 1757-7799

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Abstract

The transition to a low‐carbon economy will entail a large‐scale structural change. Some industries will have to expand their relative economic weight, while other industries, especially those directly linked to fossil fuel production and consumption, will have to decline. Such a systemic shift may have major repercussions on the stability of financial systems, via abrupt asset revaluations, defaults on debt, and the creation of bubbles in rising industries. Studies on previous industrial transitions have shed light on the financial transition risks originating from rapidly rising “sunrise” industries. In contrast, a similar conceptual understanding of risks from declining “sunset” industries is currently lacking. We substantiate this claim with a critical review of the conceptual and historical literature, which also shows that most literature either examines structural change in the real economy, or risks to financial stability, but rarely both together. We contribute to filling this research gap by developing a consistent theoretical framework of the drivers, transmission channels, and impacts of the phase‐out of carbon‐intensive industries on the financial system and on the feedback from the financial system into the rest of the economy. We also review the state of play of policy aiming to protect the financial system from transition risks and spell out research implications.

Item Type: Article
Additional Information: Funding information: Natural Environment Research Council, Grant/Award Number: NE/S017119/1; Oesterreichische Nationalbank: Grant 17641; Stiftelsen för Miljöstrategisk Forskning
Keywords: financial stability, low-carbon economy, stranded assets, structural change, sunset industries, transition risks
Divisions: Departments > Sozioökonomie > Ecological Economics
Version of the Document: Published
Depositing User: Gertraud Novotny
Date Deposited: 10 Dec 2020 10:20
Last Modified: 10 Dec 2020 10:20
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/97670/
URI: https://epub.wu.ac.at/id/eprint/7877

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