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Money, Finance and Climate: The Elusive Quest for a Truly Integrated Assessment Model

Abstract

In this paper, we show how existing IAMs generally omit any representation of a financial sector. We then discuss the potential impacts of climate change policies and climate change events on the financial sector as shown in the existing literature. We underline how the structure of the financial sector itself could impact the carbon trend of the economy. We then see how these specific linkages between the financial and the climate sector can be represented in new types of IAMs, and how they have already started to be addressed, notably in the stock-flow consistent models literature. We conclude on the necessary convergence agenda between climate policies addressing the financial goals in article 2 of the Paris Agreement and financial sector reforms to dampen the intrinsic financial instability.

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Notes

  1.  «Making finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development».

  2. This approach remains in the Decision preceding the Paris Agreement, with the recognition of an objective of 100 billion dollars of annual transfers to be reached by 2020 (paragraph 53).

  3. Many more initiatives can be quoted. They are more systematically described in Aglietta et al. (2016).

  4. An important part of academic debates between climate economists focuses on the «right» value for this discount rate (Espagne et al. 2012).

  5. Following (Kalecki 1971): «The long-run trend is but a slowly changing component of a chain of short-run situations; it has no independant entity».

  6. These economies are characterized in Cahen-Fourot and Lavoie (2016): «Money is created through credit previously to the production process: it anticipates the socially validated production arising from both the market and the non-market sectors. Ultimately, the central bank closes the macroeconomic circuit by refinancing the banks that are in need of central bank money and by lending to the State».

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Correspondence to Etienne Espagne.

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Espagne, E. Money, Finance and Climate: The Elusive Quest for a Truly Integrated Assessment Model. Comp Econ Stud 60, 131–143 (2018). https://doi.org/10.1057/s41294-018-0055-7

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  • DOI: https://doi.org/10.1057/s41294-018-0055-7

Keywords

  • Climate finance
  • Paris Agreement
  • IAM
  • Financial instability
  • Stock-flow consistent models

JEL Classification

  • Q54
  • Q57
  • E6
  • E12
  • G1