The role of public and private finance in supporting low-carbon investments in an agent-based computational model (with Marco Valente)
In the past decades, the research community has agreed on the compelling need to tackle climate change because of the natural and financial risks it entails. The implementation of several adaptation and mitigation policies is based on the development of new green technologies whose diffusion is, however, constrained by a number of barriers which prevent them to spread broadly and at a fast pace. By means of an agent-based computational model, the paper shows how by considering an active role of a public investment bank, especially in the case it acts as an instrument of innovation and industrial policy, could foster environmental innovation. An important emergent property of the model is that the highest aggregate levels of green quality in the market are achieved 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.
Do financial constraints hamper environmental innovation diffusion? An agent-based approach. (with Marco Valente)
- SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3106351
- SPRU Working paper series: https://www.sussex.ac.uk/webteam/gateway/file.php?name=2018-10-swps-dorazio-and-valente.pdf&site=25
We develop a model that combines evolutionary economics concepts and methods with environmental economics concerns. The model is populated by consumers, heterogeneous firms, and a financial sector and is used to investigate the dynamic interactions between the demand and supply side, and the role played by binding financial constraints, in the diffusion of environmental innovations. The aim of the model is to understand how environmental goals can be effectively promoted and achieved in presence of a financial sector whose lending attitude is guided by long-termism rather than short-termism. We show that financial constraints act as a deterring barrier and affect firms’ innovation strategies as well as the evolution of technological paradigms. When financial constraints are less binding, firms do not perceive hindrances to the adoption of eco-innovation and, as a result, the presence of the average green technology in the market increases.
Climate finance and sustainable growth. What role for a green macroprudential policy? (with Lilit Popoyan)
In the past years, there has been a growing convergence of markets and governments to address climate change. Nevertheless, the achievement of climate goals is still affected by the so-called “green financing gap”, which urges policymakers to sustain incremental investments in green technologies in the coming decades. To fill the gap, it is important to provide more resources on environmental-friendly projects on one hand, and on the other hand, to solve the allocation problem and direct resources to low-carbon investment projects rather than carbon-intensive investments. The macro-prudential initiatives following the financial crisis, notably Basel III at the global level and Solvency II at a European scale, seem to bias short-term investment at the expense of more long-term, climate-friendly investment. While there is a growing debate among researchers and practitioners on the role of central banks and financial regulators in supporting a smooth transition to a low-carbon economy, the information on which macroprudential tool could be implemented for reaching the goal of the “green structural change” is still quite limited. Moreover, few analyses, if any, exist on the pros & cons of specific macroprudential tools in reducing the systemic risk and procyclicality of the financial sector in the case of a sustainable transition. This paper aims to fill these two gaps.
Mind the gap! Actors, regulations, and policies to bridge the climate financial gap (with Lilit Popoyan)
The achievement of the climate goals, as agreed upon in COP (2015) and COP (2016), will require incremental investments in the coming decades to meet the 2 degrees C limit.
So far, the attention of researchers has been mainly devoted to the causal relationship between the transition process to the low-carbon economy and the financial sector, by looking mainly at the interactions that originate from the former to the latter. In this paper
By looking at the available tools to address climate change we can distinguish between market- and non-market based measures. The standard market-based measures, e.g. policies that place a price on the negative externalities of carbon-intensive activities, i.e., the carbon tax, as well as policies based on subsidies aimed at fostering green technologies, seem to reflect a lack of awareness of the financial risks related to climate change. On the other side of the spectrum, there are the non-market based measures, as policies put forward by the so-called ”state development and investment banks” and the implementation of financial regulatory supervision.
In this paper, we focus in particular on the non-market based policies. We investigate the extent to which macroprudential policies, governmental policies, and state development banks can foster the transition to the green economy. In doing so, we provide an overview of the different policies currently available and discuss potential benefits that derive from their interaction in order to accelerate the so-called green transition.