Live – Green Swan 2023: macroeconomics and the net-zero transition

June 1, 2023|Written by Scott Speer, Ingrid Walker and Moriah Costa

The third annual Green Swan conference brings together senior figures from across the central banking and regulation world to discuss the impact of climate change on the financial system, and the relationship between monetary policy and the green transition.

With a particular focus on the opportunities presented by new technology, speakers include Mark Carney, Debora Revoltella, Ravi Menon, François Villeroy de Galhau, Lesetja Kganyago and Suzi Kerr.

Follow live updates from the conference, updated below, and catch up with discussions from day one.

Villeroy de Galhau: “It’s not mission creep, it’s not politicisation”


The closing panel of the day and conclusion of the conference explored what central banks should do to help combat climate change, as well as the biggest challenges facing regulators over the next year.

The three panelists, Stephany Griffith-Jones, board member at the Central Bank of Chile, François Villeroy de Galhau, governor of Banque de France, and Lesetja Kganyago, governor of the South African Reserve Bank, all agreed that the extreme weather events of last year indicated a late transition period is looking more likely.

“Nobody can say either that climate change does not exist, does not have short-term effects, including economic effects, and this is unfortunately very bad news. It could be good news if climate skeptics had disappeared… but unfortunately still in some remote US constituencies… There are still climate skeptics who don’t want to see the evidence,” Villeroy de Galhau said.

A head-and-shoulders shot of Stephany Griffith-Jones
Stephany Griffith-Jones © Banco Central de Chile

Kganyago said that while it’s been a challenging year, there have also been positives, namely an increase in green energy investment. He said technology is a very important driver when it comes to addressing climate change.

“We have one planet, we cannot walk away from the challenge that is facing us,” he added.

Villeroy de Galhau reiterated past comments that central banks “don’t have a magic wand” and that they alone can’t solve the issue of climate change alone, but that private investment and policies such as carbon pricing are also needed. Addressing climate change is ultimately part of central bank mandates, and “it’s not mission creep, it’s not politicisation”, as it has a macroeconomic impact on things like food prices and inflation.

He shared a few possible transition risk scenarios that Banque de France has run but noted there is a lot of uncertainty on the future. Still, the transition will be difficult and “nobody will escape the shock”, he said.

“An orderly transition will be less costly than an abrupt change and waiting too long,” he added.

Villeroy de Galhau said that central banks can also play a role in giving signals to the markets, and that private investment and blended finance are needed. Banks can give the right market incentive to encourage more private investment in green finance, he said.

Griffith-Jones said that one of the biggest challenges for central banks is providing the same tools for risk assessment, such as statistical models for projections of physical damages and transition effects. Central banks should incorporate these into their risk analysis models, she added.

Kganyago said that climate change is a real impact and is one of the key drivers of inflation in developing countries, with the poor spending more on food than in other western countries. If nothing is done to combat climate change, then the financial sector itself could be at risk, he added.

When asked what central banks can do to help clarify the veil of uncertainty around climate change risk, Villeroy de Galhau said that Banque de France has taken the stance that monitoring climate change risk is not a nice to have, but a must have. He also noted the European Central Bank has taken steps to green their operations, such as making sure pension funds are aligned with the 1.5ºC objective by the end of 2023. While it’s a small part, it’s “a strong signal” to private investors, he said.

Kganyago added that the South African Reserve Bank has been doing what a lot of other banks have been doing, namely planning for a climate stress test in 2024, developing frameworks such as a green taxonomy, climate risk indicators, and coordinating with the national government to support their efforts and avoid mission creep.

Griffith-Jones said that for the Bank of Chile, their first line of work is related to their research methods and standardising their tool kit for their macroeconomic analysis on climate risk to financial stability and inflation, which they hope will serve as a guide to others.

When asked about their concerns over the next 12 months in respect to climate change, all three central bank officials mentioned current economic conditions and, in particular, inflation.

“We can buy green bonds, we can extend green credit lines, we can reduce our own carbon footprint, but if we fail to control inflation, then we have failed the green transition,” Kganyago said.

In addition to inflation, Villeroy de Galhau said it was important to have enough green projects that are profitable. He noted that there are a lot of negative aspects at play in regards to climate change such as the political polarisation in the US, but that there are a lot of positive things at work as well. Whether the positive will outweigh the negative depends largely on politics and, in particular, the role of China.

“My guess is that [China] will be the key factor of balance. As far as China remains in the climate agenda, remains committed, and as far as despite the rivalry between the US and China for obvious reasons, on climate we can have coordinated and common action, then I would be optimistic that the convergent forces would be stronger than the divergent ones,” he said.

Stern: ‘Action on climate change will drive economic growth’


Nicholas Stern of the London School of Economics opened a discussion on the urgency of strengthening policies in order to accelerate the green transition.

Stern noted that “the floods in Pakistan last year killed at least 15,000 people, probably an underestimation, 33 million were displaced, and 45% of the cotton crop was lost. These kinds of things are surely macro by anybody’s standards.”

Nicholas Stern speaking at a microphone
Nicholas Stern © World Resources Institute

Echoing Mark Carney’s earlier speech, Stern said that the emissions budget for 1.5ºC is very likely to be exhausted on current policies and that “delay is dangerous, kicking the can down the road is dangerous… we must recognise the importance of tipping points”. Stern warned of integrated assessment models which are broadly used by economists when calculating climate-related risks, saying “they don’t capture the scale and kind of risk” they attempt to describe.

Stern maintained that “there’s no conflict between action on climate change and economic growth. Actually, it’s the opposite. Action on climate change will drive economic growth.”

Ilan Goldfajn, president of the Inter-American Development Bank (IDB), highlighted the importance of Latin America as not only critical for the supply of transition-critical minerals such as lithium but also as a leading example. “Almost 30% of Latin America uses renewable energy, and that figure rises to 80% when looking only at Central America”.

The IDB, Goldajn claimed, has now become “the first multinational development bank to have assessed all new loans for compatibility with low greenhouse gas and climate resiliency”. Debt swaps, “not just for nature, but for climate, have been increasing in demand” with Ecuador recently completing the world’s largest conversion with IDB and the US Development Finance Corporation.

Goldajn applauded the work of central banks with disclosures and climate stress tests, but said that “there is more to do”. He said that “we need to support green financial markets by facilitating green bond issuers, developing and enforcing standards”, stressing that “climate finance needs scaling”.

Debora Revoltella, chief economist of the European Investment Bank (EIB), pointed to the EIB’s climate country risk research which found that “the countries that are most at risk of physical risks in terms of losses are those with the lowest capacities to deal with those shocks”.

The EIB has conducted research on the motivations for a single actor to invest in climate-related funding. Revoltella said:“In Europe, 60% of firms experience a physical risk, but only 35% act on them.” When looking into what constrains climate-related investment, Revoltella said “there needs to be certainty on policy direction and action”. According to Revoltella, lack of skills is another hurdle even at the European level, as well as bureaucracy.

Introducing the EIB’s work, Revoltella explained how since 2019 it has become the EU’s “climate bank” by putting a 50% target on lending for climate action and sustainability. That figure has now been exceeded, with 58% directed towards climate lending. In addition, the EIB’s portfolio is now aligned with the Paris Agreement, and crucially it assesses their lending counterparts, asking for a clear decarbonisation path and transparent disclosures.

Of the hurdles in the transition, Revoltella explained that “one constraining factor is the technical skills gap; the strategising and implementation of projects. The EIB has subsequently provided technical assistance to fill this gap to support the net-zero transition.”

Concluding the panel discussion, Goldfajn said that admitted that the scale of the task is daunting, but it “has to be done with the central bank community” who must “do more than regulate and supervise”.

Carney: ‘Plan beats no plan’

In his keynote speech, Mark Carney, UN Special Envoy for Climate Action and Finance, talked about the danger of “timidity traps”, and that central banks should mitigate risks and foster “virtuous cycles” even in inflationary environments.

Carney, who is also co-chair of the Glasgow Finance Alliance for Net Zero, began by emphasising the urgency of climate change and its potentially devastating impact on the real economy. He stressed that climate risk falls squarely within central banks’ core mandates to address prices and financial stability.

Mark Carney
Mark Carney © Bloomberg

Yet the world has suffered from a timidity trap, said Carney. Lack of ambition by policymakers has resulted in a “dithering” towards climate disaster which “at best” risks a “climate Minsky moment”. Carney warned, however, that we are in a “totally different universe” to the macroeconomic situation of the 1970s and 1980s, and that climate related-losses would far exceed those seen during that period.

Carney said central banks have a “duty” to adopt a precautionary approach that “prepares for the possibility of failure” and does everything in its power to dampen the financial sector multipliers. He stressed that transition planning is a crucial aspect of this and quoted US Treasury Secretary, Timothy Geithner who, following the 2008 banking crash, said “plan beats no plan”.

He elaborated that central banks and regulators must engage with financial institutions’ transition plans in both routine supervision and forward-looking scenario analyses. Central banks should work in tandem with securities’ regulators to create international standards. Carney highlighted vital work by the Network for Greening the Financial System (NGFS) and Basel Committee on Banking Supervision in this area.

Carney also discussed the need to invest in transition activities, including in hard-to-abate sectors, and the challenges posed by the near-term inflationary impacts of transition.

He stated that while high and volatile inflation “can be vanquished” and need not be permanent, the same could not be said of climate related losses. He expressed “confidence” that central banks can manage the slight upward pressure on inflation in the first decade of the transition.

Carney highlighted credible monetary policy as essential to minimising inflationary impacts and discussed the possible positive aspects of a green growth boom. Which, he said, may “[reduce] the risk that monetary policy is trapped at the effective lower bound”.

Carney argued that “enormous investment” is needed to meet climate goals and that central banks must support the growth of the needed financial infrastructure. He also recognised that central banks have already shown leadership in this process and have been “far from idle”, both as supervisors and macroprudential managers and collectively.

Throughout his address, Carney highlighted measures that pursue global climate and economic goals and will prevent regulatory fragmentation.

For example, he welcomed the release of the International Sustainability Standards Board’s final climate disclosure standards, expected later this month, anticipating that it will provide consistent, comparable and decision-useful information for financial institutions. He also remarked on work by the NGFS in developing forward-looking climate scenarios and system-wide stress testing.

Macroeconomic impacts of transition and physical risks


The first panel of day two discussed the macroeconomic impacts of transition and physical risks, with a focus on analytical perspectives. The discussion was chaired by Elias Albagli, director of the Central Bank of Chile, who asked how big, short-term negative shocks of the transition can be turned into medium to long-term opportunities for a new industrial revolution.

John Hassler, Professor of Economics at Stockholm University, presented the IPCC’s research showing a linear relationship between cumulative CO2 and mean global temperature. Hassler underlined that “adaptation is key for understanding impacts, but is often not properly taken into account in damages assessments”.

Hassler said that economics, when devising policy and analysing adaptation has “a very important key role that we really haven’t taken seriously yet”. He warned of extrapolating results from econometric studies, referencing a 2015 paper which implies Sweden would gain over 500% of GDP if global warming stood at 2.5ºC at the end of the century, an implication that “of course, makes absolutely no sense”.

Tamma Carleton, environmental economics professor at the University of California, presented a diverse range of research showing the non-market effects of climate change. Based on empirical evidence, “climate damage estimates can now be empirically derived”, said Carleton. The red ribbon running through the research shows that “as you might imagine, the mortality burden is born primarily by today’s global poor”.

Studies show that climate change is affecting well-being, mortality, migration, and labour disutility in negative ways. Mortality and labour disutility will contribute massively to selective credit control so “we’re seeing that these damages have huge effects on central banking”. Although admitting that it is difficult to monetise mental health, Carleton said “we need to monetise these things in order to make them policy-relevant”.

Harvard University professor James Stock agreed that the work on non-market climate change research is critical, and that “climate policy goes way beyond GDP”. Stock presented modelling research which has shown that a $40 carbon tax reduces emissions by 2-4% while having no effect on employment or GDP. Individual actions such as diet changes are commendable, by “fundamentally we need more policy”.

Stock pointed specifically to complementary policies like “a clean electricity standard in the power sector” and more aggressive specialised policies, underlining that charging stations for electric vehicles are “a good step forward… but it doesn’t go far enough”.

Ending the session was Phillipe Aghion, whose work on endogenous growth and how technology feeds into new patterns of growth has been described as an essential contribution to the field. Answering Albagl’s question on the role of carbon taxes in the green transition, Aghion said that “carbon tax alone cannot do the job”.

Aghion concluded his presentation lamenting that Europe is behind the US (and the Inflation Reduction Act in particular) in actioning industrial policy and leading complementary policies. He said that “Europe is not equipped with the right institutions or with the right way of practising institutions that would allow us to do the equivalent to what the US is doing”.

This page was last updated June 2, 2023

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