Policy-makers should raise carbon prices early and gradually to avoid major financial sector shocks, a working paper published by the European Central Bank finds.

In “Euro area banks’ sensitivity to changes in carbon price”, Marco Belloni, Friderike Kuik and Luca Mingarelli present a model of the eurozone’s banking sector. The model uses the concept of network contagion to simulate the impact on eurozone banks of a rise in carbon prices.

The authors apply this model to a granular dataset