Presentation given during the OECD Expert workshop on Economic Modelling of Climate and Related Tipping Points by Francesco Lamperti, Scuola Superiore Sant'Anna and RFF-CMCC European Institute on Economics and the Environment
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Climate Change, Public Debt and Financial Crises: an Agent-based Modelling Analysis
1. Climate change, public debt and financial crises:
an agent-based modelling analysis
Francesco Lamperti
Institute of Economics and EMbeDS, Scuola Superiore SantโAnna (Pisa, IT)
RFF-CMCC European Institute on Economics and the Environment (Milan, IT)
f.lamperti@santannapisa.it; francesco.lamperti@eiee.org
2. Outline
1. Introduction
2. The impact of climate change in a macro-financial agent-based model with
feedback loops
3. Some considerations on climate policy and physical risks
4. Conclusions
This talk largely draws on two papers
โ Lamperti, F., Bosetti, V., Roventini, A., & Tavoni, M. (2019). The public costs of climate-induced financial instability. Nature Climate
Change, 9(11), 829-833.
โ Lamperti, F., Dosi, G., Napoletano, M., Roventini, A., & Sapio, A. (2020). Climate change and green transitions in an agent-based
integrated assessment model. Technological Forecasting and Social Change, 153, 119806.
3. Financial instability
โ Historically, financial (banking)
crises hadnโt been infrequent
events
โ Large losses in terms of output lost
(3y cum. loss wrt pre-crisis trend)
โ Large fiscal costs (gross fiscal
outlays related to the restructuring
of the financial sector)
โ We developed a growth model
endogenously generating banking
crises to study how climate change
might eventually affect their
frequency, size, impact
4. Financial stability and climate change
Our focus
โ Can physical, transition and liability risks threat financial stability, price stability and growth?
(Carney 2015; Dafermos et al. 2018; Dietz et al. 2016; NGFS 2019; ECB/ESRB 2021)
โ How can central banks and financial regulators react?
(Batten et al. 2016, Campiglio et al. 2018; Popoyan and DโOrazio 2019)
Source: IMF (2019)
5. An agent-based perspective - I
โ ABMs are simulation models studying the
evolution of complex systems
โ Complex evolving system
โ micro: heterogeneity + interactions
โ macro: emergent, evolving macro properties
โ Key features of economic ABMs
โ Heuristics/satisficing behaviours
โ Local interactions/incomplete information
โ Learning/trial and error
โ Adaptive expectations
โ General dis-equilibrium
Source: Haldane and Turrell
6. An agent based perspective - II
โ ABMs widely used in natural (e.g. physics, biology) and social sciences (economics,
marketing, finance, sociology, anthropology)
โ Within the economics of climate change, ABMs have been developed to study a
variety of issues
โ Resilience to natural disasters and shock propagation across time, space, sectors
โ Diffusion of low-carbon technologies
โ Heterogeneous risk perception and the investment in mitigation and adaptation
โ Heterogeneous beliefs and climate policy support
โ The consequences of asset stranding
โ They allow to study how frictions, non-rational behaviour and interactions through
non-trivial networks (beyond markets) affect the behaviour of an economic system
Balint, T., Lamperti, F., Mandel, A., Napoletano, M., Roventini, A., & Sapio, A. (2017). Complexity and the economics of climate change: a survey
and a look forward. Ecological Economics, 138, 252-265.
7. The โDSKโ macro-financial agent-based IAM
โ A macro-financial model of endogenous growth and fluctuations endowed with a climate module and
micro-level damage functions
โ Heterogeneity in firms, banks, households, energy plants
โ Firm-to-firm and firm-to-bank networks; competitive energy and labor markets
โ Calibration on stylised facts and simulation along a RCP8.5+SSP5 future
8. Climate damages at the micro level
โ A one-equation climate model
โ Given , we use to to project temperature
โ Firm-level climate damages
Post-shock level of the target variable
Targets:
โ labour productivity
โ capital stock
Micro-level shock
9. Climate-induced financial instability
โ Climate change increases frequency and size of banking crises
โ Key channel: non-performing loans ( credit losses)
โ Non linear effect: contained climate change might even improve stability (via higher growth and investments)
10. The effects on growth and cycles
โ Large and increasing impacts on growth
โ Augmented growth volatility
โ Qualitative change of regime in the second half of the simulation (2050-2100)
11. The effects on public debt
โ If banking crises are solved through
publicly financed bailouts, climate
change raise the fiscal costs of
crisesโ resolutions though increased
deficit
โ Reduced productivity growth and
increased volatility lower aggregate
demand (lower GDP)
โ Debt/GDP ratio shows a
slow-moving behaviour, but
projected to increase by factor of 4
at 2100
12. The feedback effect of โclimate-induced financial distressโ
โ How much of the climate-induced
effect on growth is attributable to
โfinancial distressโ?
โ We develop a counterfactual scenario
wherein loans from defaulting firms
are immediately paid out by the
government (i.e. credit supply
channel is unaffected)
โ We estimate that financial distress
responsible for about 20% of GDP
growth reduction
13. The role of macroprudential instruments
โ Bailout costs increase almost linearly with temperature
โ Capital adequacy ratios (inverse of โbanks allowance to lendโ) can partially offset the fiscal costs of financial instability
โ Policy effectiveness increases with temperature โ scope for a โclimate-based capital bufferโ?
14. What about other impact channels? An additional example
โ Can climate change affect the low carbon transition via
physical risks?
โ DSK has been used to investigate the likelihood of a low
carbon transition under different โimpact scenariosโ
โ The level of energy demand positively affect the speed of
path-dependent technological change
โ Reduced labour productivity exert large effect on output
and energy demand growth, which facilitate the transition
โ Energy efficiency shocks leave growth unaffected while
increase energy demand, which foster the pace of
technological change in the incumbent (fossil-fuel)
technology and reduce the odds of the low carbon
transition
โ Should climate policy strength reflect the distribution of
physical risks?
16. Conclusions
โ Agent based models can offer a novel and complementary perspective to the analysis of
the economic consequences of climate change
โ By leveraging on a model with heterogeneous micro-level climate damages we find
evidence of climate induced threats to financial stability
โ Financial distress in the banking sector exacerbate the macroeconomic costs of climate
change through the credit channel
โ Prudential regulation targeting climate risks can alleviate impacts, but complementary
mitigation measures are required
โ Physical risks can alter the effectiveness of climate policy: the role of distinguishing micro
level impact channels