Abstract

The transition to a low-carbon economy will entail a large-scale structural change. Some industries will have to expand their relative economic weight, while other industries, especially those directly linked to fossil fuel production and consumption, will have to decline. Such a systemic shift may have major repercussions on the stability of financial systems, via abrupt asset revaluations, defaults on debt and the creation of bubbles. Studies on previous industrial transitions have shed light on the financial transition risks originating from rapidly rising ‘sunrise’ industries. In contrast, we argue here, based on a critical review of the literature, that a comprehensive theoretical framework to analyse how declining ‘sunset’ industries might affect financial stability in the current low-carbon transition, via stranded assets or otherwise, is still lacking. We contribute to filling this research gap by developing a consistent theoretical framework of the drivers, transmission channels and impacts of the phase-out of carbon-intensive industries on the financial system as well as its feedback into the rest of the economy.

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