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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

Published: 2023-08-25

Total Pages: 36

ISBN-13:

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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.

Book Synopsis Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico by : Mr. Dimitrios Laliotis

Download or read book Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico written by Mr. Dimitrios Laliotis and published by International Monetary Fund. This book was released on 2023-08-25 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author: International Monetary Fund. Monetary and Capital Markets Department

Publisher: International Monetary Fund

Published: 2022-12-08

Total Pages: 59

ISBN-13:

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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.

Book Synopsis Mexico by : International Monetary Fund. Monetary and Capital Markets Department

Download or read book Mexico written by International Monetary Fund. Monetary and Capital Markets Department and published by International Monetary Fund. This book was released on 2022-12-08 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author: International Monetary Fund. Western Hemisphere Dept.

Publisher: International Monetary Fund

Published: 2023-11

Total Pages: 105

ISBN-13:

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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.

Book Synopsis Mexico by : International Monetary Fund. Western Hemisphere Dept.

Download or read book Mexico written by International Monetary Fund. Western Hemisphere Dept. and published by International Monetary Fund. This book was released on 2023-11 with total page 105 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author: Michaela Dolk

Publisher: International Monetary Fund

Published: 2023-08-25

Total Pages: 36

ISBN-13:

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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.

Book Synopsis From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico by : Michaela Dolk

Download or read book From Extreme Events to Extreme Seasons: Financial Stability Risks of Climate Change in Mexico written by Michaela Dolk and published by International Monetary Fund. This book was released on 2023-08-25 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author: Olarewaju, Odunayo Magret

Publisher: IGI Global

Published: 2021-06-25

Total Pages: 573

ISBN-13: 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.

Book Synopsis Handbook of Research on Climate Change and the Sustainable Financial Sector by : Olarewaju, Odunayo Magret

Download or read book Handbook of Research on Climate Change and the Sustainable Financial Sector written by Olarewaju, Odunayo Magret and published by IGI Global. This book was released on 2021-06-25 with total page 573 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author: Signe Krogstrup

Publisher: International Monetary Fund

Published: 2019-09-04

Total Pages: 58

ISBN-13: 1513511955

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Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale 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.

Book Synopsis Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature by : Signe Krogstrup

Download or read book Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature written by Signe Krogstrup and published by International Monetary Fund. This book was released on 2019-09-04 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale 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

Author: Rachel Lee

Publisher: International Monetary Fund

Published: 2024-07-12

Total Pages: 31

ISBN-13:

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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.

Book Synopsis Climate Transition Risk and Financial Stability in France by : Rachel Lee

Download or read book Climate Transition Risk and Financial Stability in France written by Rachel Lee and published by International Monetary Fund. This book was released on 2024-07-12 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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

Author: Hallie Eakin

Publisher: University of Arizona Press

Published: 2022-03-29

Total Pages: 256

ISBN-13: 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.

Book Synopsis Weathering Risk in Rural Mexico by : Hallie Eakin

Download or read book Weathering Risk in Rural Mexico written by Hallie Eakin and published by University of Arizona Press. This book was released on 2022-03-29 with total page 256 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

The Recognition of Climate Change Effects as a Risk to Financial Stability in Mexico

Author: Miguel Marmolejo

Publisher:

Published: 2020

Total Pages: 18

ISBN-13:

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During the last years, central banks have realized how necessary and urgent it is to acknowledge climate change for preserving financial and monetary stability in their countries. Internationally speaking, progress has been made in its recognition thanks to the joined efforts between scientists, economists, financiers, policymakers, and academics. The Recognition of Climate-Change Effects as a Risk to Financial Stability in Mexico: the Role of the Central Bank has been a pioneering paper in the Mexican economy. Influenced by the British and Norwegian business and thought leaderships, the author of this research anticipated potential destructive and unfortunate events that could happen if the Mexican Central Bank (Banco de Mexico) failed to implement regulatory measures for safeguarding the domestic financial system. He created and illustrated a model called the Non-Payment Chain Due to Climate-Change Effects, and managed to translate soft law into hard law by proposing legal action against financial institutions that missed to handle the involved risks.

Book Synopsis The Recognition of Climate Change Effects as a Risk to Financial Stability in Mexico by : Miguel Marmolejo

Download or read book The Recognition of Climate Change Effects as a Risk to Financial Stability in Mexico written by Miguel Marmolejo and published by . This book was released on 2020 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: During the last years, central banks have realized how necessary and urgent it is to acknowledge climate change for preserving financial and monetary stability in their countries. Internationally speaking, progress has been made in its recognition thanks to the joined efforts between scientists, economists, financiers, policymakers, and academics. The Recognition of Climate-Change Effects as a Risk to Financial Stability in Mexico: the Role of the Central Bank has been a pioneering paper in the Mexican economy. Influenced by the British and Norwegian business and thought leaderships, the author of this research anticipated potential destructive and unfortunate events that could happen if the Mexican Central Bank (Banco de Mexico) failed to implement regulatory measures for safeguarding the domestic financial system. He created and illustrated a model called the Non-Payment Chain Due to Climate-Change Effects, and managed to translate soft law into hard law by proposing legal action against financial institutions that missed to handle the involved risks.

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

Author: Etienne Espagne

Publisher: International Monetary Fund

Published: 2023-09-08

Total Pages: 57

ISBN-13:

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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.

Book Synopsis Cross-Border Risks of a Global Economy in Mid-Transition by : Etienne Espagne

Download or read book Cross-Border Risks of a Global Economy in Mid-Transition written by Etienne Espagne and published by International Monetary Fund. This book was released on 2023-09-08 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.