As a member of the European Union, Italy has committed to reducing its net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels (European Climate Law, Fit-for-55). However, achieving this ambitious target may involve transition risk, i.e. the risk associated with changes in the values of assets that cannot be fully anticipated or hedged, as a result of a late-and-sudden alignment to climate targets. This document reports the results of the Work Package 3 of Spoke 4 to understand the effects of climate transition scenarios on the Italian economy and financial systems, both in terms of their intrinsic uncertainty and potential possibility to be controlled.

The contribution is the development of an online tool that consists of a complete set of detailed economic and financial trajectories conditioned to climate scenarios and parameters. The online tool allows users to obtain aggregate and sector-level outcomes that can be visualized and exported, supporting a comprehensive analysis of the evolution of the Italian economy.

The simulations have been conducted using the EIRIN Stock-Flow Consistent macrofinancial model, calibrated on the Italian economy and enhanced to capture key aspects in the context of the low-carbon transition, such as the role of green subsidies and carbon cost pass-through.

The results focus on two critical aspects of the potential economic and financial impacts of climate change.

First, they shed light on the effects of climate transition scenarios on the Italian economy and financial systems.

Second, they assess the impacts of acute physical risk on Italy, with a specific focus on the direct and indirect effects of extreme natural hazards hitting the economy through capital stock destruction.

This analysis is particularly relevant as Italy is highly exposed to climate acute physical risks (in particular floods, droughts, and heatwaves), which have already caused major economic losses in key productive areas of the country and are expected to increase in frequency and intensity.

The results contribute to the understanding on how climate transition policies can shape the trajectory of the low-carbon transition, also providing insight into the key role of public green subsidies in counteracting the economic impacts of carbon taxation. Furthermore, the outcomes highlight that severe impacts on capital stock potentially caused by extreme natural hazard can lead to sustained economic setbacks in the absence of adequate adaptation strategies. The role of financial and prudential policies in times of crisis is crucial to providing support to economies reeling from natural disasters. This underscores the importance of developing adaptive strategies and forward-looking financial policies that not only address immediate recovery needs, but also build resilience against future risks.

The report is organized as follows. The first part includes the description of the EIRIN StockFlow consistent macro-financial model. The second part includes the description of the online tool developed. The third part shows results of the impact of climate risks in Italy and discusses policy implications.