Climate-Related Stress Testing: Transition Risks in Norway

Climate-Related Stress Testing: Transition Risks in Norway
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Volume/Issue: Volume 2020 Issue 232
Publication date: November 2020
ISBN: 9781513559674
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Summary

This paper explores three possible transmission channels for transition risk shocks to the financial system in Norway. First, we estimate the direct firm-level impact of a substantial increase in domestic carbon prices under severe assumptions. Second, we map the impact of a drastic increase in global carbon prices on the domestic economy via the Norwegian oil sector. Third, we model the impact of a forced reduction in Norwegian oil firms’ output on shareholder portfolios. Results show that such a sharp increase in carbon prices would have a significant but manageable impact on banks. Finally, the paper discusses ways to advance the still evolving field of transition risk stress testing.