ABSTRACT This study examines whether climate change risk weakens banking‐system stability in the European Union and assesses how renewable energy adoption and energy‐related taxation moderate this relationship. Using panel data for 27 EU countries from 2012 to 2022 and applying fixed‐effects OLS, two‐stage least squares (2SLS), and robust generalized method of moments (GMM) estimations, the analysis consistently shows that higher climate risk reduces banking‐system stability. Both renewable energy consumption and energy taxes mitigate this adverse effect, though the stabilizing influence of renewable energy exhibits diminishing returns at higher deployment levels and energy‐tax moderation is stronger in countries with higher fiscal stringency. These patterns hold across alternative outcome measures and identification strategies. The study contributes to climate‐finance research by integrating environmental governance mechanisms into the assessment of financial stability and by highlighting the role of sustainable energy transitions and environmental tax policy in strengthening the resilience of European banking systems.
Md Yousuf Ali (Sun,) studied this question.