1,721,037 research outputs found
The EIRIN Flow-of-funds Behavioural Model of Green Fiscal Policies and Green Sovereign Bonds
No full textFiscal and monetary policies, as well as new financial instruments, could play a key role to meet the Paris Agreement. However, deep uncertainty characterizes their design and their potential effects on growth, financial and credit market stability, and inequality. We develop the EIRIN flow-of-funds behavioural model to simulate the introduction of green fiscal policies and green sovereign bonds, and we display their effects on firms' investments in the brown and green sector, on unemployment, on the credit and bonds market. EIRIN is Stock-Flow Consistent and is rooted on a balance sheet approach. It adopts a Leontief production function with no substitution of the production factors, i.e., Labour, Capital, and Raw Materials. Its sectors are endowed with adaptive behaviours and expectations, and interact with the others and the foreign sector through a set of markets. Simulations show that green public policies can promote green growth by influencing firmsâ expectations and the credit market. Green sovereign bonds represent a short-term win-win solution, while green fiscal measures have higher immediate distributive effects that induce negative feedbacks on the economy. These results are influenced by the conditions (fiscal, budgetary and public debt/GDP) in which both measures are implemented
Climate risks and financial stability
Full text linkClimate change has been recently recognised as a new source of risk for the financial system. Over the last years, several central banks and financial supervisors have recommended investors and financial institutions to assess their exposure to climate-related financial risks. Central banks and financial supervisors have also started to design scenarios for climate stress tests - to- assess how vulnerable the financial system is to climate change. Nevertheless, the financial community falls short of methodologies that allow the successful analysis of the risks that climate change poses to financial stability. Indeed, the characteristics of climate risks (i.e., deep uncertainty, non-linearity and endogeneity) challenge traditional approaches to macroeconomic and financial risk analysis. Embedding climate change in macroeconomic and financial analysis using innovative perspectives is fundamental for a comprehensive understanding of the macrofinancial relevance of climate change. This Special Issue is devoted to the relation between climate risks and financial stability and represents the first comprehensive attempt to fill methodological gaps in this area and to shed light on the financial implications of climate change. It includes original contributions that use a range of methodologies – such as network modelling, dynamic evolutionary macroeconomic modelling and financial econometrics – to analyse climate-related financial risks and the implications of financial policies and instruments aiming at the low-carbon transition. The research insights of these contributions can inform the decisions of central banks and financial supervisors about the integration of climate change considerations into their policies and financial risk assessment
A Financial Macro-Network Approach to Climate Policy Evaluation
Full text linkExisting approaches to assess the economic impact of climate policies tend to overlook the financial sector and to focus only on direct effects of policies on the specific institutional sector they target, neglecting possible feedbacks between sectors, thus, underestimating the overall policy effect. To fill in this gap, we develop a methodology based on financial networks, which allows for analyzing the transmission throughout the economy of positive or negative shocks induced by the introduction of specific climate policies. We apply the methodology to empirical data of the Euro Area to identify the feedback loops between the financial sector and the real economy both through direct and indirect chains of financial exposures across multiple financial instruments. By focusing on climate policy-induced shocks that affect directly either the banking sector or non-financial firms, we analyze the reinforcing feedback loops that could amplify the effects of shocks on the financial sector and then cascade on the real economy. Our analysis helps to understand the conditions for virtuous or vicious cycles to arise in the climate-finance nexus and to provide a comprehensive assessment of the economic impact of climate policies
Asset-level assessment of climate physical risk matters for adaptation finance
Full text linkClimate physical risk assessment is crucial to inform adaptation policies and finance. However, science-based and transparent solutions to assess climate physical risks are limited, compounding the adaptation gap. This is a main limitation to fill the adaptation gap. We provide a methodology that quantifies physical risks on geolocalized productive assets, considering their exposure to chronic and acute impacts (hurricanes) across the scenarios of the Intergovernmental Panel on Climate Change. Then, we translate asset-level shocks into economic and financial losses. We apply the methodology to Mexico, a country highly exposed to physical risks, recipient of adaptation finance and foreign investments. We show that investor losses are underestimated up to 70% when neglecting asset-level information, and up to 82% when neglecting tail acute risks. Therefore, neglecting the asset-level and acute dimensions of physical risks leads to large errors in the identification of adaptation policy responses, investments and finance tools aimed to build resilience to climate change.The authors develop a methodology to quantify climate physical risks, both chronic and acute, on productive assets. Investor losses are underestimated up to 70% when neglecting asset level information, and up to 82% when neglecting tail acute risks
Derisking the low-carbon transition: investors’ reaction to climate policies, decarbonization and distributive effects
No full textThe role of climate finance policies and instruments in scaling up and derisking low-carbon investments has received growing research attention. However, financial actors’ reaction to climate finance initiatives, and their implications on decarbonization of the economy and on inequality, has not been assessed yet. Our manuscript contributes to address this knowledge gap by analysing under which conditions government’s climate finance policies and investors’ climate risk adjustment can affect the success of the low-carbon transition and the ability to close the green investment gap. We further develop the EIRIN Stock-Flow Consistent behavioural model with a financial market, an energy market and investors’ portfolio choice of financial contracts, for the European Union. First, we study the macroeconomic impacts of government’s green subsidies that can be financed either by introducing an unanticipated carbon tax or by issuing green sovereign bonds. Then, we assess how investors adjust firms’ risk assessment in reaction to the carbon tax introduction, and how this affects firms’ low-carbon investment decisions. We find that both a carbon tax and green bonds financing can give rise to trade-offs in terms of decarbonization of the economy (absolute emission reductions), distributive effects and public debt sustainability. The channels of transmission differ and are policy and instrument specific. Green subsidies that are financed by green sovereign bonds issuance generate positive spillovers on GDP growth and less distributive effects than a carbon tax. Nevertheless, due to the relative decoupling of the economy, GDP growth impairs emission reduction efforts. Finally, investors’ climate risk adjustment helps to smooth this trade-off, contributing to a full decoupling
The double materiality of climate physical and transition risks in the euro area
Full text linkWe analyse the double materiality of climate physical and transition risks in the euro area economy and banking sector. First, by tailoring the EIRIN Stock-Flow Consistent behavioural model, we provide a dynamic balance sheet assessment of the Network for Greening the Financial System (NGFS) scenarios. We find that an orderly transition achieves early co-benefits by reducing CO2 emissions (12% less in 2040 than in 2020) while supporting growth in economic output. In contrast, a disorderly transition worsens the economic performance and financial stability of the euro area. Further, in a disorderly transition with higher physical risks, real GDP decreases by 12.5% in 2050 relative to an orderly transition. Second, we analyse how firms’ expectations about climate policy credibility (climate sentiments) affect investment decisions in high or low-carbon goods. Firms that trust an orderly policy introduction do anticipate the carbon tax and switch earlier to low-carbon investments. This, in turn, accelerates economic decarbonization and decreases the risk of carbon-stranded assets for investors. Our results highlight the crucial role of early and credible climate policies to signal investment decisions in the low-carbon transition
Breaking the economy: How climate tail risk and financial conditions can shape loss persistence and economic recovery
No full textAcute physical risks are becoming more frequent and severe, with future scenarios projecting further intensification. Such events can cause significant and potentially persistent economic losses, and strain public finances due to increasing disaster response and recovery costs. However, so far, macroeconomic models have struggled to capture the impacts of climate physical risks in the economy and public finance in a consistent way. In particular, tail weather events and key shock transmission channels are often neglected, leading to a partial assessment of disaster losses and of the recovery needs. This information, in turn, is crucial to assess the climate insurance protection gap and to design adequate and financially sound public policy response. To address this gap, we tailor and extend EIRIN, a Stock-Flow Consistent macrofinancial model of an open economy, calibrated at the country level. EIRIN is composed of a limited number of heterogeneous agents and sectors of the real economy and finance, which interact through markets. Importantly, the real and the financial side of the economy are modelled in an integrated way. Agents are represented as a network of interconnected balance sheet items calibrated on real data, and are characterised by bounded rationality. This approach enables us to analyse the conditions for economic disruptions to emerge and become persistent, considering climate tail risk scenarios, and the role of fiscal and credit constraints as amplification mechanisms. We calibrate EIRIN on Italy, a country that is highly exposed to natural disasters, has significant fiscal vulnerabilities and high public debt. We find that extreme weather events leading to 15% of firms’ capital stock loss, coupled with subsequent financial constraints on lending, can trigger large and persistent adverse effects on GDP growth and public debt levels. Negative shocks are amplified in absence of country’s adaptation strategies and tailored financial policies
Pandemics, Climate and Public Finance
Full text linkThe outbreak of COVID-19 and the containment measures are having an un-precedented socio-economic impact in the European Union (EU) and elsewhere. The policies introduced so far in the EU countries promote a ‘business as usual’ economic re-cover y. This short-term strategy may jeopardise the mid-to-long-term sustainability and financial stability objectives. In contrast, strengthening the socio-economic resilience against future pandemics, as well as other shocks, calls for recover y measures that are fully aligned to the objectives of the EU Green Deal and of the EU corporate taxation policy. Tackling these long-term objectives is not more costly than funding the current short-term measures. Remarkably, it may be the only way to build resilience to future crises
Climate Transition Risk and Development Finance: A Carbon Risk Assessment of China's Overseas Energy Portfolios
No full textThe role of development finance institutions in low‐income and emerging countries is fundamental to provide long‐term capital for investments in climate mitigation and adaptation. Nevertheless, development finance institutions still lack sound and transparent metrics to assess their projects' exposure to climate risks and their impact on global climate action. To attempt to fill this gap, we develop a novel climate stress‐test methodology for portfolios of loans to energy infrastructure projects. We apply the methodology to the portfolios of overseas energy projects of two main Chinese policy banks. We estimate their exposure to economic and financial shocks that would result in government inability to introduce timely 2°C‐aligned climate policies and from investors' inability to adapt their business to the changing climate and policy environment. We find that the negative shocks are mostly concentrated on coal and oil projects and vary across regions from 4.2 to 22 percent of the total loan value. Given the current leverage of Chinese policy banks, these losses could induce severe financial distress, with implications on macroeconomic and financial stability
The double materiality of climate physical and transition risks in the euro area
Full text linkThe analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, firms’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Finally, the impact on GDP of orderly and disorderly transitions are highly influenced by the magnitude of shocks in NGFS scenarios. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks
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