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The transition to a low-carbon economy will require the disappearance or adaptation of economic activities that emit greenhouse gases. Their assets are likely to become “stranded”, i.e., to see their value diminish rapidly, or even become zero. These “stranded assets” include the financial stocks that underpin these companies’ investments. The value of their shares, bonds and loans may fall as the transition progresses. The transition will therefore also affect financial agents. If too great, these impacts could have negative repercussions on financial stability, culminating in a full-blown crisis.
This doctoral thesis addresses the issue of transitional financial risks, focusing on macro-financial aspects. It examines how financial instability risks may emerge along mitigation trajectories compatible with the Paris Agreement. As there is a multiplicity of such paths, the main contribution of this PhD is to disentangle the characteristics of the scenarios leading to the highest macro-financial transition risks. It develops a macroeconomic model to simulate transition paths for studying financial fragility. Faced with the theoretical, empirical and methodological uncertainties of such an exercise, this assessment is complemented by theoretical and empirical avenues aimed at improving future transition risk assessment. Finally, this PhD opens onto a public policy discussion by investigating a radical proposal to mitigate transition risks.
This thesis begins with a critical review of the literature on transition risk. This literature review has helped to better identify causal links relevant to the study of transition risks, while also highlighting gaps in the literature (Chapter 1).
The PhD goes on to answer its main question and studies transition risks along mitigation trajectories. It first proposes a consistent stock-flow model applicable to mitigation trajectories, the Financial Asset Stranding Model – Investment in Decarbonisation (FASM-ID), and applies it to a series of scenarios dedicated to the study of transition risks (Chapter 2). This methodology is then extended to a large set of scenarios drawn from the Intergovernmental Panel on Climate Change database to determine which scenarios are most sensitive to transition risks (Chapter 3).
Then, building on the previous chapters, the thesis proposes some theoretical and empirical advances for a better assessment of transition risks. First, a new way of modeling economic expectations, identified as a key factor in transition risks, is proposed (Chapter 4). Next, the thesis studies the evolution of financial agents’ exposure to greenhouse gas-intensive companies between the Paris Agreement and the Covid crisis. This approach aims to better understand how the distribution of transition risks in the financial system may evolve over time, in order to better model the dynamic behavior of the financial sector and design appropriate policies (Chapter 5).
Finally, in the last section, the thesis proposes a case study of a radical policy to combat transition risks: the creation of a climate “bad bank”. This institution would take stranded assets onto its balance sheet in order to reduce transition risks. This chapter compares this policy with the bad banks set up during financial crises, and proposes an outline for a climate bad bank (Chapter 6).