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What are physical and transition risks, and how do they relate to carbon emissions?

Answer

Carbon emissions are the main driver of climate change, raising the global mean temperature and increasing the frequency and intensity of hazard events. This represents a risk of physical damages to assets, known as “physical risks”.  

To contain climate change, one of the main solutions that have been imagined is thus to impose a tax on carbon to incentivize companies to reduce their carbon footprint. This tax represents a risk for companies, in particular those heavily reliant on carbon. Those risks are called “transition risks”. 

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