Project description
Aligning finance with climate stability
A double systemic challenge awaits European societies. First, they will need to move towards a low-carbon productive system to mitigate climate change. Second, they will have to minimise the economic and financial disruptions this transition could trigger. To achieve these goals, financial systems have to be aligned with climate stability and transition objectives. This is why the EU-funded SMOOTH project will delve into the psychological and institutional barriers to low-carbon investments, and will develop a novel macro-financial analytical framework to study potential decarbonisation scenarios. Combining climate macroeconomics, behavioural finance and political economy, this framework will analyse financial drivers and obstacles, as well as their implications for growth, financial stability, employment, distribution and private/public debt.
Objective
The threat of climate change calls for a rapid transition to a low-carbon society. Aligning the financial system with climate stability is a crucial prerequisite for achieving decarbonisation while preserving economic prosperity and societal welfare. However, we currently lack a comprehensive understanding of how the institutional and behavioural features of financial systems may affect the speed and shape of the low-carbon transition. Additionally, the coevolving socioeconomic, financial and environmental repercussions of such a large-scale societal transformation have not yet been systematically analysed. The SMOOTH project will lay the foundations of an innovative macro-financial analytical framework to provide essential insights on the links between financial systems and decarbonisation dynamics. Methodologically, I will introduce a breakthrough by linking macroeconomic analysis with an original evidence-based representation of investment decisions based on forward-looking expectations of transition pathways. In the course of five years, this integrated modelling framework will enable the first comprehensive assessment of the transition financial drivers and obstacles, and their implications for growth, financial stability, employment, private/public debt and functional distribution, with a focus on Europe. Building on this knowledge, a harmonised set of policies aimed at achieving a rapid and smooth transition can be designed. I will go beyond the current state of the art by integrating the analysis of fiscal policies with monetary policies and financial regulation, and investigating their institutional requirements and implications. SMOOTH will create a new interdisciplinary field of research integrating elements from macroeconomic modelling, climate economics, behavioural finance, socio-technical transition theory and political science, lifting the analytical power of transition modelling to a new level and opening up novel avenues for future research.
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Funding Scheme
ERC-STG - Starting GrantHost institution
40126 Bologna
Italy