Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico

Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico
Author: Mr. Dimitrios Laliotis
Publisher: International Monetary Fund
Total Pages: 36
Release: 2023-08-25
Genre: Business & Economics
ISBN:

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This paper explores a novel forward-looking approach to study the financial stability implications of climate-related transition risks. We develop an integrated micro-macro framework with a new class of scenario called delayed-uncertain pathways. An additional stochastic financial modeling layer via a jump-diffusion process is considered to capture continuously changing risks, as well as the potential of large/sudden shocks in the financial markets. We applied this approach to study transition risks in the Mexican financial sector. But the implications are global in scope, and the framework is easily adaptable to other countries. We quantify the projections of future distributions of various risk metrics and, hence, the evolving tail risks due to compounding effects from delays in transitioning to a low-carbon economy and the consequent uncertainty of the future policy path. We find that the longer the delays in transition, the larger the future tail financial risks, which could be material to the overall system.

Mexico

Mexico
Author: International Monetary Fund. Monetary and Capital Markets Department
Publisher: International Monetary Fund
Total Pages: 59
Release: 2022-12-08
Genre: Business & Economics
ISBN:

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Mexico is exposed to both transition and physical risks from climate change. Mexico’s total energy supply is dominated by fossil fuels and non-renewable energy sources. The country is the second largest emitter of greenhouse gases (GHG) in Latin America. Emissions are highly concentrated in a few economic sectors that play an important role in the Mexican economy. The Mexican financial sector has sizable exposures to these emission intensive sectors. As such, the transition to a low carbon economy raises challenges for the economy and financial sector that need to be considered. Meanwhile, Mexico is exposed to a range of physical risks, including acute risks associated with floods and tropical cyclones, by virtue of the exposure to both the North Atlantic and Eastern Pacific hurricane basins, droughts, and heatwaves, and chronic risks.

Mexico

Mexico
Author: International Monetary Fund. Western Hemisphere Dept.
Publisher: International Monetary Fund
Total Pages: 105
Release: 2023-11
Genre: Business & Economics
ISBN:

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A broad-based expansion is underway, with robust domestic demand. Inflation has started to recede, and prudent fiscal policy has kept public debt in check. The changes underway in the global economy—including a shift to a lower carbon economy and the reshaping of supply chains—provide an important opportunity for Mexico. However, a broad set of reforms will be needed to translate this opportunity into improved employment prospects and better living standards.

From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico

From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico
Author: Michaela Dolk
Publisher: International Monetary Fund
Total Pages: 36
Release: 2023-08-25
Genre: Business & Economics
ISBN:

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This paper explores the financial stability implications of acute physical climate change risks using a novel approach that focuses on a severe season associated with a sequence of tropical cyclone and flood events. Our approach was recently applied to study physical risks in the Mexican financial sector, but the framework is applicable to other countries as well. We show that even if the scale of individual climate events may not be material at an aggregate national scale, considering a sequence of events could lead to potentially significant macro-financial impacts in the short term. This could occur even if none of the individual events affect the particular region(s) with highest concentrations of banking sector exposures. Our results indicate potential for even greater effects in the future given the increasing severity and frequency of extreme events from climate change. Thus, this paper highlights the importance of considering sequences of extreme physical risk events driven by climate change, rather than just individual extreme events, to better understand financial stability implications and design effective policies.

Handbook of Research on Climate Change and the Sustainable Financial Sector

Handbook of Research on Climate Change and the Sustainable Financial Sector
Author: Olarewaju, Odunayo Magret
Publisher: IGI Global
Total Pages: 573
Release: 2021-06-25
Genre: Business & Economics
ISBN: 1799879690

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Climate change is a major problem, generating both risks and opportunities that will have a direct impact on the economy and the financial sector. In recent years, climate change has threatened both the survival of the financial system and economic development. The growing occurrence of extreme climate events combined with the imprudent nature of economic growth can cause unsustainable levels of harm to the financial sectors. On the other hand, it presents a range of new business challenges. In contrast to the most evident physical risks, companies are vulnerable to transformational risks that arise from the reaction of society to climate change, such as technological change, regulation and markets that can boost the cost of doing business, threats to the profitability of existing goods, or effects on the value of the asset. Climate change also offers new business opportunities, and it has made research in the context of a sustainable financial sector indispensable. The Handbook of Research on Climate Change and the Sustainable Financial Sector focuses on the impacts of climate change on various sectors of the world economy. This book covers how businesses can improve their sustainability, the impact of climate change on the financial sector, and specifically, the impacts on financial services, supply chains, and the socio-economic status of the world. Beyond focusing on the impacts to the financial industry itself, this book assesses how climate change in the financial sector affects the well-being of society in areas such as unemployment, economic recessions, decreases in consumer purchases, and more. This book is essential for stockbrokers, business managers, directors, fund managers, financial analysts, consultants and actuaries, institutional investors, policymakers, practitioners, researchers, academicians, and students interested in a comprehensive view of the impact of climate change on the financial sector.

Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature

Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature
Author: Signe Krogstrup
Publisher: International Monetary Fund
Total Pages: 58
Release: 2019-09-04
Genre: Business & Economics
ISBN: 1513512927

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Climate change is one of the greatest challenges of this century. Mitigation requires a largescale transition to a low-carbon economy. This paper provides an overview of the rapidly growing literature on the role of macroeconomic and financial policy tools in enabling this transition. The literature provides a menu of policy tools for mitigation. A key conclusion is that fiscal tools are first in line and central, but can and may need to be complemented by financial and monetary policy instruments. Some tools and policies raise unanswered questions about policy tool assignment and mandates, which we describe. The literature is scarce, however, on the most effective policy mix and the role of mitigation tools and goals in the overall policy framework.

Climate Transition Risk and Financial Stability in France

Climate Transition Risk and Financial Stability in France
Author: Rachel Lee
Publisher: International Monetary Fund
Total Pages: 31
Release: 2024-07-12
Genre:
ISBN:

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This study empirically investigates the impact of the climate transition on the French financial sector using a micro-macro approach to examine the long-term effects of climate mitigation and decarbonization policies on sectoral output and the effects on firm profitability and the likelihood of corporate defaults. We employ a recursive-dynamic, multi-regional, multi-sectoral computable general equilibrium (CGE) model to simulate the Fit-for-55 climate scenario and then integrate the sectoral output paths derived from the model into firm-level corporate balance sheets and risks. We then assess the extent of credit exposure of banks to energy-intensive sectors. Our findings indicate that, under the Fit-for-55 scenario, the mining, chemicals and manufacturing sectors might face notable increases in their probability of defaults, in turn creating pockets of vulnerabilities in some parts of the banking system depending on their exposure to these energy-intensive sectors. This highlights the importance for a timely and orderly transition, including integrating climate transition plans into the prudential framework.

Weathering Risk in Rural Mexico

Weathering Risk in Rural Mexico
Author: Hallie Eakin
Publisher: University of Arizona Press
Total Pages: 256
Release: 2022-03-29
Genre: Social Science
ISBN: 0816548064

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From floods and droughts to tsunamis and hurricanes, recent years have seen a distressing and often devastating increase in extreme climatic events. While it is possible to study these disasters from a purely scientific perspective, a growing preponderance of evidence suggests that changes in the environment are related to both a shift in global economic relations and these weather-related disasters. In Weathering Risk in Rural Mexico, Hallie Eakin draws on ethnographic data collected in three agricultural communities in rural Mexico to show how economic and climatic change not only are linked in cause and effect at the planetary scale but also interact in unpredictable and complex ways in the context of regional political and trade relationships, national economic and social programs, and the decision-making of institutions, enterprises, and individuals. She shows how the parallel processes of globalization and climatic change result in populations that are “doubly exposed” and thus particularly vulnerable. Chapters trace the effects of El Niño in central Mexico in the late 1990s alongside some of the principal changes in the country’s agricultural policy. Eakin argues that in order to develop policies that effectively address rural poverty and agricultural development, we need an improved understanding of how households cope simultaneously with various sources of uncertainty and adjust their livelihoods to accommodate evolving environmental, political, and economic realities.

Low-Carbon Development for Mexico

Low-Carbon Development for Mexico
Author: Todd M. Johnson
Publisher: World Bank Publications
Total Pages: 182
Release: 2009-12-14
Genre: Political Science
ISBN: 0821381237

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To reduce the risk of climate change impacts it is necessary for the world to lower the carbon intensity of economic development. 'Low-Carbon Development for Mexico' estimates the net costs, greenhouse gas (GHG) emission reductions, and investment that would be needed to achieve a low-carbon scenario in Mexico to the year 2030. Among the key findings of the study are the following: Energy efficiency. Improving energy end-use efficiency in the industrial, residential, and public sectors is the least-cost option for reducing carbon emissions and can be achieved by accelerating current Mexican programs and policies. Supply efficiency and renewable energy. Mexico can lower the carbon intensity of the economy by improving the efficiency of energy supply in the electric power and petroleum industries, and by expanding the adoption of renewable energy technologies such as wind, biomass, small hydro, and geothermal. Public transport and vehicle fleet efficiency. Transport is the largest and fastest growing contributor of GHG emissions in Mexico, the majority of which comes from road transport. The greatest potential for reducing transport emissions lies with improving the quality and efficiency of urban transport, including more efficient vehicles and the design and organization of cities and public transport systems. Forestry significant potential with large co-benefits. Measures to reduce emissions from deforestation and forest degradation (REDD), along with afforestation and commercial plantations, are among the largest GHG mitigation options in Mexico, and could provide numerous social and environmental benefits in rural areas. By undertaking a limited number of low-carbon interventions that are technologically and financially viable today, Mexico could hold carbon emissions relatively constant over the coming two decades while maintaining a vigorous rate of economic and social development. The costs of such a program would be relatively modest, but would require a range of regulatory and institutional changes to achieve, especially in the energy and transport sectors.

Cross-Border Risks of a Global Economy in Mid-Transition

Cross-Border Risks of a Global Economy in Mid-Transition
Author: Etienne Espagne
Publisher: International Monetary Fund
Total Pages: 57
Release: 2023-09-08
Genre: Business & Economics
ISBN:

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This paper analyzes the cross-border risks that could result from a decarbonization of the world economy. We develop a typology of cross-border risks and their respective channels. Our qualitative and quantitative scenario analysis suggests that the mid-transition – a period during which fossil-fuel and low-carbon energy systems co-exist and transform at a rapid pace – could have profound stability and resilience implications for global trade and the international financial system.