Climate Change Economics

This study reviews how climate change could be considered an additional source of financial market risk using a bibliometric methodology. We find that the primary impetus for academics’ research into these concerns has come from significant international climate change events, e.g., the adoption of the Paris Climate Agreement. Ecological Economics, Energy Policy, and Energy Economics emerge as the major journals of the existing research output. The bibliographic coupling analysis of the corpus further reveals the existence of five major themes. The first theme evaluates the climate risk and explores mechanisms by which can financial risks be impacted by climate change. The second theme talks about the losses brought on by climate change. The third theme talks about how climate finance products, such as green bonds, green securities, and green insurance, are created and issued, as well as how they help to address and mitigate climate risks. The fourth theme examines how the current financial policy frameworks and instruments can be optimized and adapted in light of the considerable degree of uncertainty that surrounds climate change. The fifth theme discusses the climate-related financial risk modeling. We provide a summary of the development of these themes as well as the future direction to be explored.

We analyze whether metrics of climate risks, as captured primarily by changes in temperature anomaly and its stochastic volatility (SV), can predict returns and volatility of 25 commodities, covering the overall historical period of 1258 to 2021. To this end, we apply a higher-order nonparametric causality-in-quantiles test to not only uncover potential in-sample predictability in the entire conditional distribution of commodity returns and volatility but also to account for nonlinearity and structural breaks which exist between commodity returns and the metrics of climate risks. We find that, unlike in the misspecified linear Granger causality tests, climate risks do predict commodity returns and volatility, though the impact on the latter is stronger, in terms of the coverage of the conditional distribution. Insights from our findings can benefit academics, investors, and policymakers in their decision-making.

The economic consequences of frequent weather events at the firm level have received considerable attention in recent years. This study empirically investigates the impact of climate change risk on firms’ trade credit, using Chinese-listed firms as research subjects. The results suggested that climate change risk has a negative impact on corporate trade credit by deepening firms’ financial distress and lowering the level of industry competitiveness. Both digital transformation and government transparency were found to have a significant negative moderating effect. Heterogeneity analyses showed that firms without environmental background executives, nonstate-owned firms, and nongreen firms were more significantly affected. Finally, we found that the green, low-carbon city pilot policy had a benign effect on corporate trade credit.

China’s risk disasters caused by climate change have increased the risk-taking level of China’s commercial banks, posing a threat to the stable development of financial markets. Based on the data from 152 commercial banks in China from 2011 to 2021, this paper uses the fixed effect model to analyze the effect and mechanism of China’s climate change on the risk-taking level of Chinese commercial banks. The main conclusions are as follows. (1) Climate change has significantly improved the risk-taking level of Chinese commercial banks. The results remain significant under the robustness and endogenous tests, such as dealing with endogenous problems, changing variables and adjusting sample intervals. (2) The results of heterogeneity analysis show that under different regions and different types of conditions, the impact of climate change on the risk-taking level of China’s commercial banks is heterogeneous, and the impact is stronger in urban commercial banks and eastern China. (3) The direct economic losses caused by natural disasters caused by climate change affect the risk-taking level of Chinese commercial banks; however, the adjustment of ex ante disaster insurance can weaken the impact of climate change on the risk-taking level of Chinese commercial banks. This paper studies the impact of climate change on the risk-taking level of Chinese commercial banks from the perspective of bank risk-taking level, which is of great significance to enhance the risk prevention awareness of Chinese commercial banks in response to climate change.

This study investigates the impact of meteorological disaster risk perception on stock liquidity of Chinese listed companies by constructing meteorological disaster risk perception indicators through the Baidu index. Empirical evidence reveals that an increase in meteorological disaster risk perception decreases investors’ risk appetite and increases investors’ loss aversion, which in turn negatively affects stock liquidity. In addition, the increase in meteorological disaster risk perception also shrinks stock trading volume by reducing investor sentiment. The negative effect of meteorological disaster risk perception on stock liquidity is more pronounced in summer and winter and for firms located in water-rich areas. The findings of this study provide empirical evidence from investors’ perspective for understanding the impact of meteorological disasters on stock market liquidity.

Financial supervisors across the world recognize the threats posed by climate change. This research aims to examine the immediate impact of climate risks on bank returns using an event study methodology, with data from 42 A-share listed banks in China spanning the years 2012–2022. The findings reveal a delayed effect of climate risks on commercial banks. Hydrological disasters such as floods significantly reduce the returns of large state-owned, national joint-stock, and city commercial banks. Additionally, the launch of China’s carbon emissions trading market leads to a short-term decline in returns for national joint-stock banks, while rising loan exposure and weakening market sensitivity (MS), induced by climate change, reduce the returns of commercial banks. However, bolstering credit risk management proves effective in enhancing profitability. This study provides insights at the market level into the financial implications of climate change for banking institutions, supplementing existing evidence.