Environment

Pamela Campa, Lucija Muehlenbachs, 22 July 2021

Every year in the US around 5,000 cases are brought against defendants for violating federal environmental statutes, with defendants given the opportunity to volunteer ‘Supplemental Environmental Projects’ in lieu of a cash penalty. This column uses the history of US federal environmental cases between 1997 and 2017 to examine the implications of such in-kind settlements for firms and communities. The findings suggest that on economic grounds, the use of Supplemental Environmental Projects is beneficial and worth continuing and that, as recommended by the OECD, environmental agencies worldwide could fruitfully use in-kind settlements.

Paul Hiebert, 13 July 2021

Climate change will impact those parts of the financial system most exposed to its disruptive effects. This column analyses a new financial stability risk mapping for the EU financial system, linking financial exposures of thousands of banks, insurance companies, and investment funds to millions of firms subject to climate risk. It highlights a high level of risk concentration, both in European regions subject to climate hazards as well as economic sectors with diverse carbon emission intensities. Long-term scenario analyses suggest that the risks will be best addressed through proactive policies that directly contain global temperature rises. 

Sander Hoogendoorn, Arjan Trinks, Johannes Bollen, 13 July 2021

Pricing carbon and placing a tax on industrial emissions could be a centrepiece of national climate policies going forward. This column uses simulations from a global trade model to show that the introduction of a substantial carbon tax for Dutch industry strongly reduces domestic emissions, while production losses remain modest. However, significant carbon leakage of up to around half of the emissions reduction achieved in the Netherlands occurs, mainly to non-European countries such as China and India.

Derek Lemoine, 09 July 2021

If economists are going to be able to offer clear guidance about the appropriate ambition of climate change policy, we need firmer damage estimates. This column introduces a new model that prices farmers’ ex-post and ex-ante adaptations to weather changes and forecasts. When applied to US agriculture, the model shows a much more pessimistic outcome than currently expected, and encourages the consideration of substantial changes to agricultural policies.   

Timo Löyttyniemi, 08 July 2021

Financial stability is at the core of central banking. This column assesses the various risks to financial stability stemming from climate change, which arise from physical risks, transition risks, and the chosen transition path towards a net zero economy. Additional risks arise from the changes in government policies, risks in green investments, mispricing of assets, and potential changes in metrics. The channels for financial instability are, as usual, the sustainability of government debt, the vulnerability of banking, and the volatility and liquidity of securities markets. Awareness of these additional financial stability risks could increase financial stability.

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