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A New Measure of Climate Transition Risk Based on Distance to a Global Emission Factor Frontier

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Abstract
Targeted financing of transition to a "net zero" global economy entails climate transition risk. We propose a measure of transition risk at the country-sector dyad level composed of five tiers of transition risk based on two factors: i) the gap between a dyad's existing emission factor (EF) -- a measure of the greenhouse gas intensity of output -- and the global 'frontier' sectoral EF, and ii) a dyad's recent convergence towards the frontier EF. Dyads that are either close to the frontier or converging towards the frontier carry lower transition risk. Our measure, using 45 sectors across 66 countries, accounts for both direct greenhouse gas emissions as well as those that enter into production through complex supply chains as captured by intercountry, input-output tables, and can be applied at different levels of stringency to high-, middle-, and low-income economies. Our measure thus accounts for, and sheds light on, EF reductions through investment in lower emissions production techniques in own facilities as well as sourcing intermediate inputs with lower embodied emissions.

Suggested Citation

  • Talan B. İşcan & Benjamin Dennis, 2024. "A New Measure of Climate Transition Risk Based on Distance to a Global Emission Factor Frontier," Finance and Economics Discussion Series 2024-017, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-17
    DOI: 10.17016/FEDS.2024.017
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    References listed on IDEAS

    as
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    6. Stefano Carattini & Garth Heutel & Givi Melkadze, 2023. "Climate Policy, Financial Frictions, and Transition Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 778-794, December.
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    More about this item

    Keywords

    Transition risk; Greenhouse gas emissions; Direct emissions; Production emissions; Convergence;
    All these keywords.

    JEL classification:

    • E16 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Social Accounting Matrix
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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