Environmental Dynamic Stochastic General Equilibrium (E-DSGE) models have become increasingly prevalent in climate transition risk assessment, offering valuable insights into the complex interactions between climate policy, macroeconomic performance, and financial stability. The E-DSGE model developed in this paper is a multi-sector dynamic stochastic general equilibrium model incorporating pollution externalities, banking-sector financial frictions, carbon tax policies, and a differentiated capital adequacy ratio (CAR) requirement policy. It is well-equipped for analyzing how carbon pricing generates transition risks in China, how financial frictions amplify these risks, and how structural macroprudential policy can mitigate them while achieving emission reduction targets.
The team published their paper in Energy and Climate Management on August 20, 2026.
“This E-DSGE model aims to evaluate the macroeconomic and financial stability impacts of carbon tax policies, identify the climate transition risks arising from rapid decarbonization, examine how financial frictions in the banking sector amplify these risks, and assess whether a differentiated capital adequacy ratio requirement policy can mitigate transition risks while achieving emission reduction targets,”said Ying Fan, corresponding author of the paper, professor in the School of Economics and Management at Beihang University and Director of the MOE Laboratory for Low-carbon Intelligent Governance (LLIG).
The team presents an overview of the E-DSGE model and its policy applications. The model incorporates pollution externalities, banking-sector financial frictions, carbon tax policies, and a differentiated capital adequacy ratio requirement policy within a multi-sector dynamic general equilibrium framework. It is applied to evaluate the macroeconomic and financial stability impacts of carbon tax policies—the so-called transition risks—to analyze how financial frictions amplify these risks through credit contraction and bank net worth losses, and to assess whether differentiated CAR requirements can mitigate transition risks while achieving emission reduction targets. The model is well-equipped for policy coordination analysis under China’s dual carbon goals.
The modeling methods used in the E-DSGE model are described in detail, including the model sectors and agents (households, green and brown firms, banks, and the government), parameter calibration procedures, the representation of pollution externalities and banking-sector financial frictions, the differentiated capital adequacy ratio (CAR) requirement policy, climate policy simulation methods, dynamic optimization and equilibrium conditions, and numerical implementation.
The research team expects the paper to guide model users and spur further development of E-DSGE modeling in China. Ying Fan said, “The E-DSGE model is well-equipped for future applications in climate policy analysis under China’s dual carbon goals. We expect to further integrate the model with economic fluctuations and, within a business cycle framework, explore optimal policy combinations and coordination.”
Other contributors include Shanhua Zhang and Hao Jin from the School of Economics and Management at Beihang University and the MOE Laboratory for Low-carbon Intelligent Governance (LLIG) at Beihang University.
This work was supported by the Fundamental and Interdisciplinary Disciplines Breakthrough Plan of the Ministry of Education of China (No. JYB2025XDXM904) and the National Natural Science Foundation of China (No. W2412161).
D OI Link:
https://doi.org/10.26599/ECM.2026.9400038
Energy and Climate Management
Synergistic impact of structural macroprudential policies on climate transition risks
20-Aug-2026