Too late, too sudden: Transition to a low-carbon economy and systemic risk

In the report entitled “Too late, too sudden: Transition to a low-carbon economy and systemic risk”, the Advisory Scientific Committee of the European Systemic Risk Board analyses the transition risk in an adverse scenario, where the transition to a low-carbon economy occurs late and abruptly.

Key points

In a benign scenario, the transition to a low-carbon economy occurs gradually: adjustment costs are manageable, and the repricing of carbon assets probably does not entail systemic risk.

In an adverse scenario, the transition to a low-carbon economy occurs late and abruptly.

The adverse scenario could affect systemic risk via three main channels:

the macroeconomic impact of sudden changes in energy use;
the revaluation of carbon intensive assets;
and a rise in the incidence of natural catastrophes.

In response to the potential systemic risk involved, macroprudential policymakers could encourage the disclosure of non-financial firms’ carbon intensity.

The report points out what could be the short and medium term policy response.