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Giovanna Bua

31 January 2024
WORKING PAPER SERIES - No. 2899
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Abstract
The European Union plays a prominent role in climate regulations initiatives, this commitment likely implies that climate risk premiums look different in Europe compared to the rest of the world. This paper examines the pricing implications of climate risks in euro area corporate bond markets, focusing on physical and transition risk. Using climate news as a gauge for systematic climate risk, we find a significant pricing effect of physical risk in long-term bonds, with investors demanding higher returns on bonds exposed to physical risk shocks. The estimated physical risk premium is 34 basis points, indicating increased awareness and hedging demand after the Paris Agreement. Transition risk premiums are smaller and less significant, reflecting the ongoing transition to a low-carbon economy. Our findings contribute to understanding climate risk pricing in the European bond markets, highlighting the importance of physical risk and the evolving nature of investor demand for climate-resilient assets.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
4 July 2022
WORKING PAPER SERIES - No. 2677
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Abstract
We examine the existence of physical and transition climate risk premia in euro areaequity markets. To do so, we develop two novel physical and transition risk indicators, basedon text analysis, which are then used to gauge the presence of climate risk premia. Resultssuggest that climate risk premia for both, transition and physical climate risk, have increasedsince the time of the Paris Agreement. In addition, we investigate which metrics may be usedby investors to proxy a firm’s exposure to either physical or transition risk. To this end, weconstruct portfolios according to the most common firm-specific climate metrics and estimatethe sensitivity of these portfolios to our risk indicators. We compare results from these firmlevelproxies to much simpler sectoral classifications to see if investors may simply pigeonholefirms into the industry they operate in. We find that firm level information appears to beused as a gauge for transition risk, in particular since 2015, whereas sectoral classificationsappear insufficient. However, sectoral classification may be employed to broadly gauge firms’exposures to physical risk.
JEL Code
C58 : Mathematical and Quantitative Methods→Econometric Modeling→Financial Econometrics
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
Q51 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Valuation of Environmental Effects
26 April 2022
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 3, 2022
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Abstract
The price of emissions allowances traded on the EU Emissions Trading System (ETS) has risen from below €10 per metric tonne of carbon to above €90 since the beginning of 2018. This box outlines the main reasons behind this increase and examines whether speculative activity may have played a significant role. It concludes that, at present, tangible evidence for a marked increase in speculative activity related to potential changes in market structure appears scarce. Furthermore, a speculation index suggests that, while speculation appears to have increased slightly since early 2019, it remains relatively moderate and well below readings during earlier phases of the ETS.
JEL Code
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G38 : Financial Economics→Corporate Finance and Governance→Government Policy and Regulation
23 September 2021
ECONOMIC BULLETIN - BOX
Economic Bulletin Issue 6, 2021
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Abstract
In its climate change action plan, the ECB committed to accelerating the development of new models and conducting theoretical and empirical analyses to monitor the implications of climate change and related policies for the economy. As a first step in its detailed roadmap of climate-related actions, the ECB envisages the inclusion of technical assumptions on carbon pricing in Eurosystem/ECB staff projections. Against this backdrop, this box summarises the genesis and basic features of the EU emissions trading system (ETS), the system setting the carbon price in the EU. The EU ETS, which began operating in 2005, is a “cap and trade” system where a cap is set by the EU on the total amount of greenhouse gases that can be emitted by the activities covered by the system. It has been implemented in “phases” designed to gradually reduce the cap while increasing the scope of the system. In July 2021 a revision of the EU ETS was proposed in the context of the “Fit for 55” package. Meanwhile, the price of emissions allowances traded on the EU ETS has increased from €8 per tonne of carbon dioxide equivalent at the beginning of 2018 to around €60 more recently. So far, the main impact of changes in emissions allowance prices has been on HICP energy inflation, and, overall, the risk that emissions allowance prices under the current EU ETS may translate into significantly higher headline inflation in the near term appears limited. However, against the backdrop of the ECB’s recently announced action plan, these and other climate change mitigation polices will be further explored with regard to their implications for macroeconomic modelling and monetary policy.
JEL Code
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
Q43 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Energy→Energy and the Macroeconomy
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming
21 September 2021
OCCASIONAL PAPER SERIES - No. 271
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Abstract
This paper analyses the implications of climate change for the conduct of monetary policy in the euro area. It first investigates macroeconomic and financial risks stemming from climate change and from policies aimed at climate mitigation and adaptation, as well as the regulatory and fiscal effects of reducing carbon emissions. In this context, it assesses the need to adapt macroeconomic models and the Eurosystem/ECB staff economic projections underlying the monetary policy decisions. It further considers the implications of climate change for the conduct of monetary policy, in particular the implications for the transmission of monetary policy, the natural rate of interest and the correct identification of shocks. Model simulations using the ECB’s New Area-Wide Model (NAWM) illustrate how the interactions of climate change, financial and fiscal fragilities could significantly restrict the ability of monetary policy to respond to standard business cycle fluctuations. The paper concludes with an analysis of a set of potential monetary policy measures to address climate risks, insofar as they are in line with the ECB’s mandate.
JEL Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
Q54 : Agricultural and Natural Resource Economics, Environmental and Ecological Economics→Environmental Economics→Climate, Natural Disasters, Global Warming