A global green transition is necessary in order to maintain a robust Danish economy with stable prices and financial stability in the long term. However, the transition may have repercussions on the economy and the financial sector.
The Nationalbank has therefore mapped the risks of the green transition and is in the process of assessing the economic and financial consequences thereof.
The Nationalbank is therefore developing a new method to assess risks for the economy and the financial system in Denmark as a result of the green transition. The method combines an internationally leading climate and environmental economic model with large amounts of data on companies and their borrowing from Danish banks and mortgage institutions.
The method is based on a number of new scenarios for how the green transition can proceed. The focus of the scenarios is exclusively on the materialization of risks that create economic and financial losses in Denmark in connection with the transition.
The assessment of the economic and financial consequences of the green transition in the new method is built around scenarios.
The starting point is a basic scenario for Danish climate policy and economy. In addition to the basic scenario, a number of risk scenarios have been developed in which the transition does not proceed as expected in the basic scenario. The risk scenarios are based on climate-related events that Danmarks Nationalbank has previously assessed may challenge price stability or financial stability in Denmark.
GreenREFORM model
Together with the DREAM group, Danmarks Nationalbank has developed the GreenREFORM model, which analyses different scenarios for the green transition. A central example in the analysis shows that if Denmark does not achieve the expected CO2e reductions through new technology, the goals can still be achieved by raising CO2e taxes. The calculations show that these additional taxes will only have limited economic and financial consequences.
The taxes may lead to a small decrease in gross domestic product (GDP) and employment, but they also create a transition where resources are shifted from emission-intensive industries to sectors with a lower climate footprint. The overall impact on inflation and the public finances is estimated to be minimal.
Banks and mortgage-credit institutions are expected to be able to handle the losses that arise as a result of the transition. Loan impairments are expected to increase by approximately DKK 700 million, but this amount represents a small share of the sector's total profits. However, the analysis shows that some medium-sized banks may experience greater pressure, especially those with large exposure to agriculture.
The Nationalbank emphasizes that a gradual and predictable introduction of CO2e taxes is crucial to ensure an orderly transition. This will not only minimize risks for the financial sector, but also create a clear framework for companies and investors.
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