Climate change and the required low-carbon transition will involve a fundamental revamp of the energy and material basis of our socioeconomic systems (Bataille et al., 2016). This will deeply modify not only the energy sector but also all the sectors that directly or indirectly rely on the use of fossil energy via their supply chains. Even high income and highly serviticized economies remain highly dependent on natural resources, all the more so regarding energy provision. This makes it highly uncertain to reach climate goals and to respect the objectives of the Paris Agreement to limit global warming to well below 2°C above pre-industrial levels while aiming at limiting the temperature increase to 1.5°C (Cahen-Fourot et al., 2020a, 2021; Krausmann et al., 2020; Masson-Delmotte et al., 2018; OECD, 2019; Schandl et al., 2018; Wiedenhofer et al., 2019).

Beyond physical risks due to natural events, the climate crisis entails socioeconomic risks. As the Intergovernmental Panel on Climate Change (IPCC) puts it (Masson-Delmotte et al., 2018, p. v), “limiting warming to 1.5ºC is possible within the laws of chemistry and physics but would require unprecedented transitions in all aspects of society”. The transformation towards a climate friendly economy, e.g. through a low-carbon transition, can trigger economic and financial instability with potentially systemic repercussions.

Given the scope of the transformations needed, policies used to address sustainability issues and manage climate and sustainability risks - e.g. standards on natural resources use efficiency, carbon/eco-taxes, environmental border adjustment mechanisms,carbon markets, integration of climate and sustainability risks in monetary policy and financial regulation - will have profound implications for the existing institutions ensuring the functioning of our economies. This project aims at studying the effects of aligning monetary policy and financial regulation with climate and sustainability objectives on prevailing socioeconomic patterns.

Monetary policy and financial regulation will not be reformed in a socioeconomic and institutional vacuum. Economic and monetary history indicates that substantial changes in the monetary regime – the whole set of monetary and financial rules – were often followed by important changes in the patterns of capital accumulation, of the organization of production and of income distribution (Guttmann, 2002; Steininger and Sigmund, 2020).

The intuition motivating the project is, therefore, that the ongoing modifications in the monetary regime to align it with sustainability issues (Barmes and Livingstone, 2021; Campiglio, 2016; Campiglio et al., 2018; D'Orazio and Popoyan, 2019; Monasterolo et al., 2017; Semeniuk et al., 2021; Dikau and Volz, 2019) may be the early signs of such a transformation. Through directing money flows towards low-carbon activities, a sustainable shift in the monetary regime could entail counter-intuitive disruptions in existing social compromises stabilizing the prevailing growth regimes in high income countries.

These social compromises were historically based to a significant extent on cheap and abundant fossil energy fueling productivity gains that support income redistribution mechanisms and welfare-oriented states and enabling mass production and mass consumption (Cahen-Fourot and Durand, 2016; Görg et al., 2019; Huber, 2013; Mitchell, 2011). The possible transformations in the growth regime induced by the shift in the monetary regime may disturb historical social compromises, potentially creating a new source of transition risk alongside economic and financial risks: social instability.

A recent striking exemple of such additional transition risk is the Yellow Jackets movement that erupted in France in October 2018 as a reaction to a tax on fossil fuels. The European Commission’s Green Deal proposal insists that our societies must undergo a just transition, fair and inclusive (European Commission, 2019). These potentially additional disruptive mechanisms need therefore to be addressed and understood to ensure that the low-carbon transition happens fast and smoothly enough to manage climate and sustainability risks sufficiently while promoting social, economic and financial stability.

To investigate how a climate- and sustainability-aligned monetary regime could trigger new potential transition risks and how to implement it smoothly, the project will investigate the following four research questions:

1. The institutional complementarity between the monetary regime and other key institutional forms underlying prevailing growth regimes (e.g. the state, work relations, insertion into the international regime, competition regime, the economy-environment relation).

2. Where central banks and financial authorities actually stand in the integration of climate and sustainability risks management into monetary policy and financial regulation.

3. The long-term relations between key variables at the core of social compromises (e.g. the energy-productivity gains-income distribution nexus) that have stabilised growth regimes until now.

4. The potentially disruptive effects of a climate- and sustainability-aligned monetary regime on these long-term relations and how to avoid or tame these effects.

 

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