A new article by Irene Monasterolo, Assistant Professor of Climate Economics and Finance at the Institute of Ecological Economics and Co-Author Marco Raberto has been published in the journal Ecological Economics. 

Abstract

Meeting the Paris Agreement and the Sustainable Development Goals requires an urgent reallocation of investments into low-carbon sectors. The introduction of green fiscal and monetary policies, and new financial instruments such as green bonds, was recently advocated by practitioners and academics. However, deep uncertainty characterizes their design and their potential effects on growth, financial stability and inequality. The EIRIN flow-of-funds behavioural model developed by Irene Monasterolo and Marco Raberto contributes to fill in this gap investigating under which conditions green public policies and instruments can promote green investments by influencing firms' decisions (through NPV) and the credit market. Green sovereign bonds emerge as a short-term win-win solution for the low-carbon transition (new green investments, green jobs and capital accumulation) and credit market stability, while green fiscal measures have negative short-term feedbacks on the real economy. However, both interventions differ in terms of distributive effects on households' purchasing power and wealth concentration in the bank agent. This difference could be explained by the conditions - i.e., country's fiscal characteristics and fiscal elusion, budget balance constraints (e.g. fiscal compact) and interest on sovereign bonds - in which they are implemented. Further developments introduce the simulation of a green Quantitative Easing (QE) and macroprudential policies – on the climate-finance-inequality nexus.

Background:

• Anthropogenic climate change was recognized as a main source of risk not only for ecosystems but also for the performance of the real economy (IPCC, 2014; Dietz et al 2016), inequality (Hsiang et al., 2017), and the stability of the financial system (ESRB, 2016; Battiston et al., 2017).

• The reallocation of investments towards sustainability is considered as a precondition to meet the interconnected objectives of sustainability and financial stability (HLEG, 2017). However, capital is not flowing in low-carbon projects at the pace and amount needed.

• Green policies such as green fiscal and green monetary policies (Monnin and Barkawi, 2015), and the introduction of new financial instruments, (e.g., green bonds), gained attention as tools to overcome the green investment gap.

• However, there is high uncertainty about their design and implementation, due to the lack of consolidated knowledge on their direct and indirect effects on the real economy and on financial markets, and their distributive effects (income inequality and wealth concentration) across economic sectors and social groups.

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Link to the article: https://doi.org/10.1016/j.ecolecon.2017.07.029