Conference Agenda

Amid the growing financial vulnerabilities posed by climate change, we investigate macroprudential capital buffers to mitigate systemic risks and increase the resilience of the banking sector. Leveraging granular loan-level data and advanced stress testing methods, we quantify potential bank losses attributed to climate-related risks. Focusing on short-term transition risk scenarios, we document a significant variance among banks in their risk exposure, with the most exposed institutions being those characterized by lower excess capital. Subsequently, we introduce a methodological framework for tailoring bank-specific buffer requirements to cover these losses, offering macroprudential authorities a practical method for calibrating climate-related macroprudential capital buffers, complementing microprudential policies. The study demonstrates the potential of macroprudential capital buffers to mitigate potential climate-related losses and contributes to the understanding of the appropriate prudential policy response to these challenges.

The most effective approach to tackling climate change is by decarbonizing production processes. However, decarbonization might render assets stranded, impacting not only the relevant sector but also causing a ripple effect across all sectors, thereby potentially destabilizing macroeconomic stability. We develop a multi-sector New Keynesian model with two physical capital types (brown and green) and input-output linkages to examine the economic impact of sector-specific capital stranding. Stranded brown capital in the brown sector yields a relocation of economic activities to the green sector and thus environmental benefits with small aggregate consequences, while brown capital stranding in both sectors implies larger economic costs and smaller environmental benefits. Brown consumption taxes and green productivity shocks facilitate the green transition, while brown investment taxes or green investment subsidies turn out to be less favorable policies in this respect. However, a combination of these two investment policies yields favorable economic and environmental outcomes. Doubling the carbon tax in the brown sector yields significant relocation activities at relatively small economic costs. If the central bank responds strongly to short-run inflationary pressures of carbon tax increases, this leads to larger output losses in the short run and higher output gains in the long run.

Carbon markets are a central instrument to decarbonize our economies and mitigate the impacts of climate change. Within the European Union, carbon pricing to date has primarily targeted electricity generation and greenhouse gas-intensive industries, and regulatory focus has typically been confined to a subset of firms. This paper explores how the carbon price confronting regulated firms not only shapes their own operations and investment choices but also exerts influence on other entities within their customer and supplier network, even in the absence of direct carbon pricing mandates for suppliers or clients. Such influence could manifest through direct price effects or alterations in production processes, market structures and innovation. Leveraging a distinctive dataset for Belgium, this research investigates the impact of the EU’s carbon price on low-carbon innovation, productivity, production dynamics, and energy intensity throughout the entire industrial sector’s production network. We refrain from drawing conclusions given the preliminary nature of this work.

Early awareness of policies informs investors and firms in their planning. In this paper we

discuss the role of early policy information for industry built-up at the case of the green energy

transition. We use new data from the Swiss commercial registry to explore empirically

the impact of a feed-in tariff policy announcement and its implementation two years later

on the number of new firm entries. Our study reveals a significant relationship between

information on the policy and firm entries, suggesting that credible policy announcements

can spur new industry development. We then develop a theoretical model to substantiate

the link between announcements of myopic governments and firm entry. We consider entrepreneurs

investing in fixed costs the period before they produce based on the announced

subsidy by the government but payed out in the subsequent period. We can show that

governments can use announcements as important information for investment decisions and

- as shown in the empirical analysis - foster new firm entries before the policy is in place.

We finally discuss to which degree our results hold for a wider range of political institutions

and conclude with the implications for policymakers.