Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/222741 
Year of Publication: 
2019
Series/Report no.: 
ADBI Working Paper Series No. 974
Publisher: 
Asian Development Bank Institute (ADBI), Tokyo
Abstract: 
This paper maps the risk arising from the transition to a low-emission economy and studies its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulations deteriorates firms' balance sheets as it internalizes the pollution costs, which consequentially accelerates the risks that the financial system faces. This empirical study, which employs the Clean Air Action that the Chinese government launched in 2013 as a quasi-experiment, supports the theoretical implications. The analysis of a unique dataset containing 1.3 million loans shows that the default rates of high-polluting firms rose by around 50% along their environmental policy exposure. At the same time, the loan spread charged to such firms increased by 5.5% thereafter, indicating that the banks do price the environment-related risks, but not sufficiently.
Subjects: 
Environmental DSGE Model
Clean Air Action
lending spread
default rate
JEL: 
E32
E50
Q43
H23
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper

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