Yannis Dafermos, climate chang and finance

Climate change and finance: the big picture Yannis Dafermos University of the West of England, Bristol, UK Post-Growth Conference, European Parliament, 18 September 2018

ď‚– Issue 1: Climate change poses risks to the financial system.

Linking climate change with finance

September 2018

ď‚– A climate-impaired financial system matters: it can exacerbate the economic and social effects of climate change. ď‚– Issue 2: Can the financial system facilitate the transition to a low-carbon economy?

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ď‚– The DEFINE (Dynamic Ecosystem-FINanceEconomy) model is an ecological macroeconomic model that can be used to analyse the interaction between climate change and finance.

Modelling the climatefinance links

September 2018

ď‚– The model draws on the post-Keynesian and the ecological economics tradition. ď‚– More details about the model can be found here: www.define-model.org

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CO2 emissions

The physical risks in a business as usual scenario

September 2018

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CO2 emissions

The physical risks in a business as usual scenario

September 2018

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Atmospheric temperature

Is green QE the solution?

September 2018

• We consider a scenario in which central banks around the globe decide to buy a specific proportion of corporate green bonds, as part of a corporate green QE programme. We assume that this programme starts in 2020. • The programme reduces the interest rate on green bonds, allowing firms to undertake green investment at a lower cost.

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Atmospheric temperature

Is green QE the solution?

September 2018

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CO2 emissions

How about green differentiated capital requirements?

September 2018

• Two potential forms of green differentiated capital requirements: (a) Capital requirements on green loans are reduced (‘green supporting factor’). (b) Capital requirements on brown loans are increased (‘brown penalising factor’).

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How about green differentiated capital requirements?

September 2018

• Green supporting factor: CO2 emissions (+): can reduce the pace of climate change (-): lower bank capital; can lead to a green credit bubble • Brown penalising factor: (+): higher bank capital (-): less effective in reducing climate change (but only under a narrow definition of brown loans); transition costs (but only under a broad definition of brown loans) Climate change and finance: the big picture

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CO2 emissions

How about green differentiated capital requirements?

September 2018

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ď‚– Message 1: A green transformation of the financial system can contribute to the fight against climate change (but only to some extent).

Three key messages

September 2018

ď‚– Message 2: Green finance should not be viewed as a substitute for government policies (e.g. public green investment) and low-growth strategies. It should be viewed as a complementary tool.

ď‚– Message 3: The greening of the financial system should focus on traditional banking and finance (including development and cooperative banking) and should not be extended to shadow banking (e.g. green securitisation).

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