Combined climate stress testing of supply-chain networks and the financial system with nation-wide firm-level emission estimates

Paper: arXiv 2503.10644

Authors: Zlata Tabachová, Christian Diem, Johannes Stangl, András Borsos, Stefan Thurner

Abstract

On the way towards carbon neutrality, climate stress testing provides estimates for the physical and transition risks that climate change poses to the economy and the financial system. Missing firm-level CO2 emissions data severely impedes the assessment of transition risks originating from carbon pricing. Based on the individual emissions of all Hungarian firms (410,523), as estimated from their fossil fuel purchases, we conduct a stress test of both actual and hypothetical carbon pricing policies. Using a simple 1:1 economic ABM and introducing the new carbon-to-profit ratio, we identify firms that become unprofitable and default, and estimate the respective loan write-offs. We find that 45% of all companies are directly exposed to carbon pricing. At a price of 45 EUR/t, direct economic losses of 1.3% of total sales and bank equity losses of 1.2% are expected. Secondary default cascades in supply chain networks could increase these losses by 300% to 4000%, depending on firms’ ability to substitute essential inputs. To reduce transition risks, firms should reduce their dependence on essential inputs from supply chains with high CO2 exposure. We discuss the implications of different policy implementations on these transition risks.

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 8.5/10
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: This paper presents a groundbreaking nationwide climate stress test by leveraging granular, firm-level VAT and loan dataset (over 410,000 firms) to estimate carbon emissions and model systemic supply-chain network cascades. While the mathematical formulation of the underlying agent-based model is straightforward, the empirical execution, dataset scale, and policy relevance are exceptionally high.

Research Flowchart

  flowchart TD
    A[Goal: Assess Economy-Wide & Financial Risks of Carbon Pricing] --> B[Data Inputs: Fossil Fuel Purchases for 410,523 Hungarian Firms]
    B --> C[Estimate Firm-Level CO2 Emissions & Carbon-to-Profit Ratios]
    C --> D[Simulate Carbon Tax Scenarios via Agent-Based Model]
    D --> E[Model Direct Defaults & Network Cascades in Supply Chains]
    E --> F[Direct Losses: 1.3% Sales & 1.2% Bank Equity Loss at 45 EUR/t]
    E --> G[Cascade Effects: Secondary Defaults Increase Losses by 300%-4000%]