Being Stranded with Fossil Fuel Reserves? Climate Policy Risk and the Pricing of Bank loans

Delis, Manthos D.; Greiff, Kathrin; Ongena, Steven

doi:10.2139/ssrn.3451335

Cited by 111 publications

(117 citation statements)

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“…24 Investors and pension funds must take action to limit the systematic risk to their portfolio from global warming (cf. Carbon Tracker Initiative, 2011Climate Counts, 2013;Generation Foundation, 2013;ESRB, 2016;Delis et al, 2019). For example, Andersson et al (2016) show how to use carbon-free trackers to hedge climate risk.…”

Section: Resultsmentioning

confidence: 99%

The risk of policy tipping and stranded carbon assets

Ploeg

Rezai

2020

Journal of Environmental Economics and Management

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If global warming is to stay below 2°C, there are four risks of assets stranding. First, substantial fossil fuel reserves will be stranded at the end of the fossil era. Second, this will be true for exploration capital too. Third, unanticipated changes in present or expected future climate policy cause instantaneous discrete jumps in today's valuation of physical and natural capital. Fourth, if timing and intensity of climate policy are uncertain, revaluation of assets occurs as uncertainty about future climate policy is resolved. E.g. abandoning climate policy plans immediately boosts scarcity rent, market capitalization, exploration investment and discoveries. To explain and quantify these four effects, we use an analytical model of investment in exploration capital with intertemporal adjustment costs, depletion of reserves and market capitalization, and calibrate it to the global oil and gas industry. Climate policy implements a carbon budget commensurate with 2°C peak warming and we allow for different instruments: immediate or delayed carbon taxes and renewable subsidies. The social welfare ranking of these instruments is inverse to that of the oil and gas industry which prefers renewable subsidy and delaying taxes for as long as possible. We also pay attention to how the legislative "risk" of tipping into policy action affects the timing of the end of the fossil era, the profitability of existing capital, and green paradox effects.

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Section: Resultsmentioning

confidence: 99%

The risk of policy tipping and stranded carbon assets

Ploeg

Rezai

2020

Journal of Environmental Economics and Management

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“…Examples of estimated climate-related losses, from the academic literature Financial Institutions  Transition risks. Delis et al (2019) find that recently banks price climate policy exposure to syndicated loans to fossil fuel firms. Vermeulen et al (2019) stress tests transition risks for industry exposures by Dutch banks, pension funds and insurance companies.…”

Section: What Is the Role Of The Financial Sector In Addressing Climamentioning

confidence: 99%

Macro-Financial Aspects of Climate Change

Feyen¹,

Utz²,

Huertas³

et al. 2020

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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“…Both Ilhan et al (2019b) and Delis et al (2019) find that the 2015 Paris Agreement was a pivotal point and that only afterwards climate change became price and risk relevant. To corroborate our finding, we test whether this is the case as well in our setting.…”

Section: The Impact Of the Paris Agreementmentioning

confidence: 99%

“…Ramelli et al (2018) complement carbon emission with data on climate responsibility from the ESG rating agency Vigeo Eiris. Finally, Delis et al (2019) hand-collect data on fossil fuel reserves from the firm's annual reports.…”

Section: Measuring Climate Riskmentioning

confidence: 99%

Does the CDS Market Reflect Regulatory Climate Risk Disclosures?

et al. 2020

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Climate change may have a detrimental effect on a firm's financial performance. Using a forward-looking measure of climate risk exposure based on textual analysis of firms' 10-K reports, we assess whether climate risks-as disclosed to the regulator-are priced in the credit default swap (CDS) market. We construct this novel climate risk measure based on BERT, an advanced language understanding algorithm, and adapt it for our purpose. We differentiate between physical and transition risks and find that transition risk increases CDS spreads, especially after the Paris Climate Agreement of 2015. However, we do not find such an effect for physical risk.

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Being Stranded with Fossil Fuel Reserves? Climate Policy Risk and the Pricing of Bank loans

Cited by 111 publications

References 0 publications

The risk of policy tipping and stranded carbon assets

The risk of policy tipping and stranded carbon assets

Macro-Financial Aspects of Climate Change

Does the CDS Market Reflect Regulatory Climate Risk Disclosures?

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