Publications

All real economic sectors depend on nature. Accordingly, lending to economic sectors carries some degree of nature-related financial risk. To assess and mitigate the potential impact of ecosystem service loss on financial stability, it is crucial to identify and measure nature-related financial risks. Using FINREP and ENCORE data, we assess the direct material dependence on nature and evaluate physical nature-related financial risks in Lithuanian commercial bank lending. While a substantial share of bank loans (70,1%) in Lithuania goes to sectors that are very highly dependent on at least one ecosystem service, the financial risks arising from hypothetical scenarios of disruption in the provision of some of these ecosystem services is markedly lower than in other European countries due to Lithuania’s geographic specificity. The case study of Lithuania illustrates that the impacts from the loss of ecosystem services are not uniform across geographic regions, that the assumption that the level of dependence on ecosystem services can serve as an approximation of physical nature-related financial risks is inappropriate for certain geographies, and that an accurate assessment of nature-related financial risks requires location-specific dependency-risk mapping matrices.

Keywords: Ecosystem Services, ENCORE, Nature-related Financial Risks, Financial Stability

JEL Codes: 58, G21, Q01, Q57

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Recently, there has been a surge of interest in policies that target climate change. This paper begins by discussing why policymakers, and central banks in particular, should be concerned about climate change, and goes on to argue why carbon pricing is an appropriate political instrument to reduce greenhouse gas (GHG) emissions. The paper details two categories of carbon pricing, namely carbon taxation and the introduction of Emission Trading Systems (ETSs), illustrating why a carbon tax is the more efficient instrument. Popular models for optimal carbon taxation and implications of carbon taxation are discussed. The paper concludes with recommendations to policymakers, which include advocacy of differentiated rather than uniform carbon taxation, phased-in carbon taxation instead of a blanket approach, introduction of the carbon border adjustment mechanism (CBAM), and Green Quantitative Easing (QE).

Keywords: carbon taxation, climate change, green QE.

JEL Codes: Q54, Q58, H23, E51, E62

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.