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Towards a post-pandemic policy framework to manage climate-related financial risks and resilience

2021, Climate Policy (forthcoming)

All G20 countries have adopted policies to tame financial instability in response to the COVID-19 pandemic. Post-pandemic financial measures are designed to support bank lending, boost financial markets’ liquidity, reduce banks’ funding liquidity costs, and allow for a smoother transition in monetary and fiscal policies. However, when analyzed in a broader framework that considers possible interlinkages between the pandemic and threats posed by climate change, these measures are not aligned with the goals of the Paris Agreement. Indeed, there is no evidence that recovery policies to date reflect sustainability priorities nor do they account for climate-related financial risks. The analysis carried out suggests that this failure to account for climate change could amplify the build-up of additional climate-related financial risks and of existing vulnerabilities in the financial system, leading to increased overall exposure to climate risks and thus undermining the low-carbon transition in G20 countries. Against this backdrop, the paper reviews several financial measures to avoid increasing the high carbon bias of existing policies and to explicitly address climate-related risks in the financial sector. The author proposes an enhanced macro-prudential policy framework to achieve three interrelated objectives: tackle climate-related financial risks, scale up green finance for a greener and more sustainable recovery, and preserve the global financial system’s resilience.

Policy insights

  • A macro-prudential strategy aligned with the goals of the Paris Agreement is needed to address carbon bias, avoid the increase of climate-related financial risks, and reorient financial flows towards sustainable investments.
  • ‘Green-enhanced’ capital requirements can be used, but they need careful calibration to prevent financial instabilities, while green liquidity instruments pose fewer implementation concerns.
  • Climate-related large exposure limits could help contain systemic risks deriving from the materialization of climate risks.
  • Harmonized taxonomy and enhanced climate-related disclosure requirements are critical for the correct functioning of proposed climate-related financial instruments.
  • Implementing such instruments in a post-pandemic financial policy framework could help underpin a transformative financial response to climate change while strengthening the resilience of the global financial system.

Exploring the effects of climate-related financial policies on carbon emissions in G20 countries: a panel quantile regression approach

2021, Environmental Science and Pollution Research, (co-authored with M. Dirks)

This paper studies the effects of financial development, economic growth, and climate-related financial policies on carbon emissions for G20 countries. The focus is particularly on financial policies implemented to scale up green finance and address climate-related financial risks from 2000 to 2017 and represent this paper’s value-added. The empirical results obtained by rely- ing on the panel quantile regression approach indicate that the impacts of the different explanatory variables on carbon emission are heterogeneous. Specifi- cally, the effect of the stock of short-term financial policies on carbon emissions is negative, and its effect becomes smaller at higher quantiles. The stock of long-term policies also shows significant negative coefficients, but its impact is stronger for higher quantiles. No significance is reported for the lowest quantile. Financial development contributes to improving environmental quality, and its impact is larger in higher emission countries. Energy consumption increases carbon emissions, with the strongest effects occurring at higher quantiles. Our results also support the validity of the EKC relationship and positive effects of GDP and population on high carbon emissions levels. Estimation results are robust to alternative model specifications and after controlling for the role played by adopting international climate change mitigation policies as proxied by the adoption of the Kyoto protocol.

Mobilising investments in renewable energy in Germany: which role for public investment banks?

2020, Journal of Sustainable Finance and Investment (co-authored with P. Löwenstein)

Although renewable energy investments are not characterized by climate change mitigation as their primary objective, they still target activities that are related to the reduction of GHG emissions and are thus crucial for the transition to a low-carbon economy. The paper offers an analysis of the peculiarity of the German public finance framework aimed at renewable energy financing. On the one hand, it quantifies the amount of public financial capital, and types of financial instruments, devoted to renewable energy starting from 2010. On the other hand, it finds a strong relationship between public funding and the mobilization of private renewable energy investments. Our results point out that, despite the rapid growth of renewable energy investments in the past decades and the progressive reduction of GHG emissions, the country is facing difficulties in meeting the desired targets.

Fostering green investments and tackling climate-related financial risks: which role for macroprudential policies? 

2019, Ecological Economics (co-authored with Lilit Popoyan)
While there is a growing debate among researchers and practitioners on the possible role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential instruments could be used for reaching the “green structural change” is still quite limited. Moreover, the achievement of climate goals is still affected by the so-called “green finance gap”. The paper addresses these issues by proposing a critical review of existing and novel prudential approaches to incentivizing the decarbonization of banks’ balance sheets and align finance with sustainable growth and development objectives. The analysis carried out in the paper allows understanding under which conditions macroprudential policy could tackle climate change and promote green lending while containing climate-related financial risks.

Income inequality, consumer debt, and prudential regulation: An agent-based approach to study the emergence of crises and financial instability

2019, Economic Modelling

The paper presents an agent-based model to study the interaction between income inequality and prudential regulations in a macroeconomic framework characterized by consumer debt. Simulation results show that income inequality is detrimental to both macro and financial stability as it leads to higher credit demands, higher unemployment rates, economic volatility, and financial fragility. Besides the importance of consumers’ leveraging, deleveraging externalities are found to be equally important for the emergence of crises and financial fragility because of the liquidity risk they entail. Minsky moments are also observed; they are related to consumers’ prudential behavior and their beliefs about the macroeconomic conditions. Concerning the policy relevance of our investigation, simulations allow us to highlight that the effectiveness of prudential regulation depends on the phase of the business cycle and that there is not a “one-size-fits-all” regulation. This study emphasizes that regulatory constraints should take into account the features of the economic agents, such as the distribution of income and their willingness to borrow, in addition to the features of the financial sector.

The role of finance in environmental innovation diffusion: an evolutionary modeling approach

2018, Journal of Economic Behavior & Organization (co-authored with Marco Valente)

The implementation of climate adaptation and mitigation policies depends on the development of green technologies whose diffusion is constrained by a number of barriers that prevent them to spread broadly and at a fast pace. By means of an agent-based computational model, the paper investigates the macro and microdynamics in the presence of a “traditional” commercial bank and the role played by a state investment bank that explicitly supports green investments. Simulation results emphasize that environmental innovation is more diffused in the market when the presence of the public investment bank is combined with strong consumers’ preferences oriented towards environmental quality. The relevance of the paper is twofold. Besides contributing to the literature on the finance-innovation nexus by considering the role of climate finance within a complex systems framework, it provides a model that can be used as a tool to explore policies to foster environmental innovation diffusion.

Big Data and Complexity: is Macroeconomics heading towards a new paradigm?

2017, Journal of Economic Methodology

The paper discusses the extent to which the availability of unprecedentedly rich datasets and the need for new approaches – both epistemological and computational – is an emerging issue for Macroeconomics. By adopting an evolutionary approach, we describe the paradigm shifts experienced in the macroeconomic research field and emphasize that the types of data the macroeconomist has to deal with play an important role in the evolutionary process of the development of the discipline. After introducing the current debate over Big Data in the social sciences, the paper presents a detailed discussion of possible and existing interactions between Big Data and Computational Behavioral Macroeconomics. We argue that Big Data applied to economic questions can lead to new styles of thinking and research methods, namely the development of a new research paradigm.

Contributions on newspapers, academic and policy blogs, and magazines

Prudential Regulation Can Help in Tackling Climate Change, Council on Economic Policies, 13 February 2019

Wie man Basel III grün machen kann, Makronom magazine, June, 13th 2019

La sfida del cambiamento climatico: quale ruolo per le banche centrali?, Il sole 24 ore, Econopoly, June, 26th 2019


D’Orazio, P., & Popoyan, L. (2020). Taking up the climate change challenge: a new perspective on central banking (No. 2020/19). Laboratory of Economics and Management (LEM), Sant’Anna School of Advanced Studies, Pisa, Italy. Link:

D’Orazio, P., & Dirks M. (2020). COVID-19 and financial markets: Assessing the impact of the coronavirus on the eurozone, N. 859/2020, Ruhr Economic Papers doi:10.4419/86788995

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