Derek Lemoine, 28 July 2021

To limit climate change, the world may eventually need to remove more carbon from the atmosphere than it puts in. However, carbon pricing, which is usually recommended as the best policy, cannot achieve negative emissions without massive government spending.  This column argues that ‘carbon shares’ could do as well as carbon pricing at limiting emissions while also properly incentivising negative emissions.

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. 

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.

Dalya Elmalt, Deniz Igan, Divya Kirti, 23 June 2021

Sustainable investment incorporating environmental, social, and governance concerns is increasingly used as an emissions-reducing policy. However, little is known about its effectiveness. This column examines the relationship between ESG metrics and emission growth across 20 countries and finds little evidence to suggest that higher ESG metrics are associated with reduced emission growth.

Jean-Philippe Bonardi, Quentin Gallea, Dimitrija Kalanoski, Rafael Lalive, Raahil Madhok, Frederik Noack, Dominic Rohner, Tommaso Sonno, 21 June 2021

A belief that the environment rebounded during Covid-19 lockdowns is widespread. This column uncovers a more complex reality. Though domestic and international lockdowns prompted a 35–45% reduction in pollution, air quality effects across the world were unequal. When restrictions were placed on some economic activities (transport and industry), people shifted to others (domestic energy). Reductions in economic activities degrade the environment in countries where domestic energy is the largest source of pollution, and policies aimed at combatting climate change must account for such diverse outcomes.

Patrick Bolton, Harrison Hong, Marcin Kacperczyk, Xavier Vives, 25 May 2021

The Covid-19 pandemic and recession have reinforced the need to evaluate the economic and financial impact of natural disasters, providing a pointer to the damaging effects that climate change may induce. This column introduces the third report in the Future of Banking series from the IESE Business School and CEPR, which explores the ways in which natural disaster risks are different from more familiar forms of financial risk – and how banks, asset managers andcentral banks are beginning to grapple with these risks. The authors call for a combination of public interventions and private sector mitigation strategies to reduce the long-term implications of climate-related events.

Yener Altunbaş, David Marques-Ibanez, Alessio Reghezza, Costanza Rodriguez d'Acri, Martina Spaggiari, 21 May 2021

The Paris Agreement explicitly recognises the need to “make finance flows compatible with a pathway toward low greenhouse gas emissions and climate-resilient development”. This column looks at the impact of the agreement on bank lending and finds that following the agreement, European banks reallocated credit away from polluting firms. In the aftermath of President Trump’s 2017 announcement of a US withdrawal from the agreement, lending by European banks to polluting firms in the US decreased even further. The findings suggest that the announcement of green policy initiatives can have a significant impact combating climate change via the banking sector. 

Philipp Hartmann, Glenn Schepens, 12 May 2021

The 2020 ECB Forum on Central Banking addressed some key issues from the ongoing monetary policy strategy review and embedded them in discussions of major structural changes in advanced economies and the post-COVID recovery. In this column, two of the organisers highlight some of the main points from the papers and debates, including whether globalisation is reversing, implications of climate change, options for formulating the ECB's inflation aim, challenges with informal monetary policy communication, relationships between financial stability and monetary policy, how to make a monetary policy framework robust to deflation or inflation traps and the role of fiscal policy for the recovery from the pandemic.

Bruno Conte, Klaus Desmet, Dávid Krisztián Nagy, Esteban Rossi-Hansberg, 04 May 2021

Trade restrictions are often invoked as a way to stem climate change. Although international transportation is an important source of carbon emissions, this view is incomplete. Using a dynamic spatial growth model, this column argues that trade can be a powerful mechanism to adapt to rising temperatures. The interaction of climate change, productivity, and migration decisions gives rise to significant global changes in populations and sectoral specialisations. On aggregate, rising temperatures are predicted to lower real GDP per capita by 6% and welfare by 15% by the year 2200. 

David Klenert, Marc Fleurbaey, 28 April 2021

The social cost of carbon is a monetary metric for the damage caused by the emission of an additional tonne of CO2. Previous literature has shown that accounting for inequality between countries significantly influences the social cost of carbon, but mostly omits heterogeneity below the national level. Using a model that features heterogeneity both between and within countries, this column demonstrates that climate and distributional policy can generally not be separated. In particular, it shows that a higher social cost of carbon may be called for globally under realistic expectations of existing inequality.

Alex Armand, Ivan Kim Taveras, 11 April 2021

When discussing the socioeconomic effects of climate change, little attention has been given to the role of the ocean. This column presents new evidence of the effect of ocean acidification on early-childhood mortality in low- and middle-income countries. Small increases in exposure to water acidity while in utero have significant effects on neonatal mortality. A closer look at possible mechanisms highlight the role of the ocean for nutrition and how overfishing represents an additional threat.

Christian Gollier, 06 April 2021

Any global temperature target must be translated into an intertemporal carbon budget and an associated cost-efficient carbon price schedule. This column uses an intertemporal asset-pricing approach to examine the impact of uncertainties surrounding economic growth and abatement technologies on the dynamics of efficient carbon prices. It finds evidence of a positive carbon risk premium and suggests an efficient growth rate of expected carbon prices of around 4% plus inflation. This is lower than the growth rates found in many public reports and integrated assessment models, and justifies a higher carbon price today in order to satisfy the carbon budget.

Patrycja Klusak, Matthew Agarwala, Matt Burke, Moritz Kraemer, Kamiar Mohaddes, 25 March 2021

Enthusiasm for ‘greening the financial system’ is welcome, but does the explosion of ‘green’ finance indicators reflect the science? This column reports research that uses artificial intelligence to construct the world’s first ‘climate smart’ sovereign credit rating. The results warn of climate-driven downgrades as early as 2030.

Patrick Bolton, Marcin Kacperczyk, 24 March 2021

A company’s carbon-transition risk – associated with curbing carbon emissions within a relatively short period of time – is proportional to the size and growth rate of the company’s carbon emissions. This column asks whether companies with different carbon emissions have different stock returns. The total level of a company’s CO2 emissions and the year-by-year growth in emissions significantly affect its stock returns in most geographic areas of the world. The increasing cost of equity for companies with higher emissions can be a form of carbon pricing by investors seeking compensation for carbon-transition risk.

Alexander Dietrich, Gernot Müller, Raphael Schoenle, 22 March 2021

Climate change has emerged as a major challenge for central banks, although its extent and the immediate consequences are highly uncertain. This column uses a survey of over 10,000 US consumers to show that irrespective of when and how climate change actually plays out, what matters for monetary policy is how people expect it to play out. Central bankers ignore the expectations channel of climate change at their peril.

Ralph De Haas, Ralf Martin, Mirabelle Muûls, Helena Schweiger, 19 March 2021

Many countries are striving for net-zero carbon emissions by 2050, requiring massive investments over the next decades. But many companies, especially smaller ones, will not be able or willing to invest in cleaner technologies. This column explores how organisational constraints can hold back the green transition of firms in less-developed economies. The findings reveal how financial crises can slow down the decarbonisation of economic production and caution against excessive optimism about the potential green benefits of the current economic slowdown, which – like any recession – has led to temporary reductions in emissions.

Avinash Persaud, 17 March 2021

For the countries on the frontline in the war against climate change, there is a nasty nexus between climate change and debt. The cost of environmental damage, the loss of revenues from a natural disaster, and the high price of building back better all contribute to higher debt. This column proposes three ways to break this climate–debt nexus: (1) redistribute special drawing rights using a new classification of vulnerability; (2) incorporate natural disaster clauses into multilateral development banks’ lending arrangements; and (3) use the unused special drawing rights of the world’s strongest countries to recapitalise regional development banks to finance resilience in the vulnerable countries without adding to their debt.

José-Luis Cruz, Esteban Rossi-Hansberg, 02 March 2021

The effects of climate change are heterogenous across space. While some regions will be significantly negatively impacted, others may benefit from warmer temperatures. This column uses an integrated assessment model with rich spatial data that looks at interactions between regions to show how the effects of global warming on production and migration are large, worrying, and unequal. Policies such as carbon taxes are effective delaying tools, but prevention of global warming will require greater and more localised policies.

Avinash Persaud, 23 February 2021

The switch to renewable energies is necessary for humanity’s future, but it is currently too slow. For developing countries, the critical obstacle is the pricing, ownership, land-use and approval processes renewable projects have to go through. This column argues that to bring dividends for sunnier, developing countries, provide more projects for green investors, and for some redemption for the rest of humanity, countries should (1) streamline the approval process, (2) broaden the ownership of assets through mandated initial public offerings and small-investor allocations while supporting big foreign investors in the short-run, and (3) offer an attractive feed-in tariff that predictably ratchets down in favour of consumers once investors reach their return threshold.

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