The Low-Carbon Transition and Financial System Stability

20 Pages Posted: 8 Dec 2016

See all articles by Carolin D. Schellhorn

Carolin D. Schellhorn

Saint Joseph's University - Department of Finance

Date Written: August 1, 2016

Abstract

The agreement of the climate-negotiating parties in Paris in December 2015 (COP21) signaled the world’s intent to decarbonize over the coming decades in order to keep the earth’s average temperature increase below 2 degrees Celsius by mid-century. A timely and smooth transition to a low-carbon economy may be accomplished if businesses routinely disclose and manage carbon dioxide emissions subject to science-based targets along with climate-related financial risks and financial performance. Existing capital budgeting techniques can help create value sustainably by focusing on the opportunity costs of both financial capital and carbon dioxide thus improving the allocations of both financial and atmospheric capital. Business efforts in this area will be most effective if guided by supportive government policy. If the voluntary responses from businesses, consumers, investors and local policy-makers fail to meet the science-based deadline for carbon dioxide emission reduction, aggressive and globally enforced carbon pricing mechanisms and emissions restrictions may become necessary. To the extent the business community is unprepared for broad-based climate policy intervention individual firm balance sheets may become impaired. In this case the greater likelihood of financial insolvencies in carbon-intensive and related industries will challenge the stability of the global financial system. It is therefore imperative that the problem of financial institutions that are “too big to fail” be addressed expeditiously by reducing financial firms’ holdings of high-carbon assets.

Keywords: Low-Carbon, Climate, Capital, Budgeting, Opportunity Cost, Policy, Carbon Pricing, Financial Firms, Externalities, Systemic Risk

JEL Classification: E44, G00, G18, G31

Suggested Citation

Schellhorn, Carolin D., The Low-Carbon Transition and Financial System Stability (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2881467 or http://dx.doi.org/10.2139/ssrn.2881467

Carolin D. Schellhorn (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States
610-660-1657 (Phone)
610-660-1986 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
69
Abstract Views
857
rank
397,973
PlumX Metrics