Abstract
This paper proposes an adjustment in the capital requirements of large financial institutions providing loans to non-financial corporations (NFC) aiming at reducing carbon emissions and contributing towards the transition to a low carbon economy. Our proposal bears some similarity with the approach taken by the Lebanese Central Bank (BCL) which adjusts the reserve requirements of banks according to the environmental footprint of their loans. The internalization of costs related to negative externalities of climate change should be considered by capital requirements under Pillar 1 of the Basel III agreement.
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