Synergistic impact of structural macroprudential policies on climate transition risks

Abstract Central banks of all countries are paying attention to how they can achieve the temperature control goal of the Paris Agreement through climate governance policies while alleviating the climate transition risks arising from such policies. The “dual carbon” goals (carbon peaking by 2030 and carbon neutrality by 2060) proposed by China have set higher requirements for current climate policies and may necessitate more ambitious measures; however, the transition risks associated with these goals cannot be overlooked. This paper constructs an environmental dynamic stochastic general equilibrium (E-DSGE) model incorporating pollution externalities, financial frictions in the banking sector and the differentiated capital adequacy ratio (CAR) requirement policy to evaluate the impact of carbon tax policies on the macroeconomy and financial stability—the so-called “transition risks”. It also discusses the effectiveness of the differentiated CAR requirement policy in mitigating such risks. The findings are as follows: (1) carbon tax policies have a significant effect on emission reduction and promote green transformation, but they cause a significant shock on banks’ net assets, threatening financial stability and generating transition risks; (2) financial frictions, by restricting banks’ loanable funds, affect capital inputs in the production sector, affect capital goods prices and increase losses in banks’ net assets, thereby amplifying transition risks; and (3) carbon tax policies combined with the differentiated CAR requirement policy can not only achieve emission reduction targets but also mitigate the transition risks caused by carbon taxes by reducing banks’ risk exposure.