Low-income households and large, rural properties are more vulnerable to climate-related energy price rises

• Central Bank research examines the potential impact of long-run energy price rises on mortgaged households.
• Households with low incomes and larger properties, and those residing in rural locations, are significantly more vulnerable.
• Targeted energy efficiency supports may be required to support households that are disproportionally impacted.

The Central Bank of Ireland has today (12 January 2023) published a Financial Stability Note, “An Estimate of Climate-Related Transition Risk in Irish Mortgage Lending” (PDF 453.04KB), authored by Tamanna Adhikari, James Carroll, and Derek Lambert. The Note examines the impact of energy price increases due to possible increases in carbon taxation to 2050.

The authors calculate new estimates of energy and emissions for mortgaged households with a view to identifying those most at risk. They find that energy consumption and emissions are positively correlated with income, property size, the number of occupants and location (rural areas). Emissions among higher-income groups are over double those of lower-income groups. Furthermore, energy usage is 40% higher in rural areas, largely due to bigger properties and higher transport expenditure.

The Note further finds that bank exposure to energy-intensive households is likely to be sizeable – close to 60% of mortgaged households are currently in “high” or “very high” energy/emissions categories. In the long run (to 2050), however, household resilience will depend on two factors – income growth and the speed of household energy/emission mitigation, for example, through increasing energy efficiency levels and switching to low-emission fuels. The authors note that lower-income households are less likely to be in a position to invest in such technologies. 

The Note finds that, in a best case scenario of 2% income growth and high energy/emissions mitigation, the average household energy-to-income ratio in 2050 would not increase. This emphasises the link between national decarbonisation targets and overall financial stability. From a policy perspective, the Note suggests that targeted transition supports for those households most at risk would help to reduce wider risks to economic and financial stability.

Notes to Editor

“An Estimate of Climate-Related Transition Risk in Irish Mortgage Lending” proposes a new methodology to populate loan-level data with borrower energy and emissions estimates.

The Note uses loan-level data from the Central Bank of Ireland’s New Mortgage Lending series. This collects information on all new mortgages within each six-month period. For the purposes of this Note, the research sample includes 218,311 loans from eight lenders, representing €50.6 billion of new lending between 2015 and 2021.

Data on energy usage is estimated using the CSO’s Household Budget Survey 2015/16 (the last year for which data is available). Energy usage estimates are then used to estimate CO₂ emissions based on conversion factors sourced from the Sustainable Energy Authority of Ireland.

Financial Stability Notes – full series