The Role of Emission Disclosure for the Low-Carbon Transition

February 27, 2024Published by Deutsche Bundesbank

Stronger disclosure mandates would reduce the economic cost of carbon taxes and shift investment flows away from fossil fuels and towards low-carbon investments, finds this paper for Deutsche Bundesbank. The results also show that improving reporting requirements earlier and quicker will lead to the biggest reduction of transition costs for the eurozone.

Imperfect disclosures mean the cost of carbon is underpriced for high-emitting entities, resulting in a disproportionate resources going to fossil fuels over low-carbon sectors, say authors Ivan Frankovic and Benedikt Kolb.

Using a structural and dynamic stochastic general equilibrium model, Frankovic and Kolb have studied the macrofinancial effects of two exogenous shocks in the eurozone: a disclosure shock and a carbon tax shock.

The authors model a scenario of information asymmetry in which non-financial companies and the financial intermediaries that provide them with funding, are fully informed about their carbon emissions. However, the parties providing funds to financial firms underestimate emissions by 20%.

They then simulated a disclosure shock by considering what happens when stricter reporting requirements increase the carbon disclosure rate from 80% to 100% without any change to carbon price.

The results show that suddenly informing depositors of undisclosed emissions causes investments in fossil fuels to decrease by 4%, while investments in low-carbon sectors increase by 1.4%.

Overall, the scenario results in a modest 0.2% decline in emissions, which the authors say highlights the importance of improving disclosures in tandem with measures that can have a greater influence on emissions.

Next, the authors study the effects of an increase to carbon taxes and find that the asset price of fossil capital drops by 22.6% on impact, and investments in the sector fall by about 70% after six years. Capital flows to the low-carbon sector more than double, resulting in a 12% increase in asset prices and a 25% emissions reduction after six years.

Without an accompanying improvement in disclosure quality, the new tax rate would reduce GDP in the eurozone by 0.72% after six years.

Coupling the tax with a 100% disclosure rate, however, would reduce the GDP cost by 13%, substantially reducing the risk of stranded assets. This equates to a €47bn saving over six years in the case of a €50 per ton increase in carbon tax, say the authors.

Where fossil fuel sectors can be more easily substituted by renewables, the benefits of increasing disclosure quality are amplified. According to the paper, this implies that regions that are more equipped for clean energy will bear comparatively lower transition costs as disclosure regulations ramp up.

Finally, the analysis shows that the marginal effects of improving disclosure are largest at the lower end of baseline disclosure quality. This indicates that “increasing the disclosure level quickly is more important than eventually lifting it to near 100%” and that “low-hanging fruits should be picked early”, say the authors.

This page was last updated February 27, 2024

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