Transition risk in emerging economies (WP/25/20)

This paper quantifies the impact of these risks if they were realised and the role of various policies and policy designs in mitigating them. It does so with a two-country two-sector environmental dynamic stochastic general equilibrium model, where each ‘country’ represents a bloc of advanced or emerging economies, respectively. The model includes real-world features such as financial frictions and financial and trade linkages across blocs. With it, we simulate climate policy in advanced economies, in the form of carbon taxes and tariffs, and international coordination around a minimum global carbon price. This paper identifies and quantifies important vulnerabilities among emerging economies to the implementation of climate policy in advanced economies.