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 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 orientated 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.
Fostering green investments and tackling climate-related financial risks: which role for macroprudential policies? (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 finance gap”. To fill it, more resources should be directed towards environmental-friendly projects, rather than carbon-intensive investments. 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 tool could be implemented for reaching the “green structural change” is still quite limited. The paper aims at contributing to this debate by reviewing the available green macroprudential tools and discuss their pros & cons in reducing the systemic risk and procyclicality of the financial sector in the case of a sustainable transition. Moreover, it provides an up-to-date mapping of green prudential regulations and tools at the OECD and European level, respectively. Finally, it suggests possible institutional arrangements between monetary and green macroprudential policies.