Periodic Reporting for period 1 - ClimateFinReg (Can we Mitigate Climate Change through Financial Regulation?)
Período documentado: 2020-10-01 hasta 2022-09-30
Problem being addressed
This project had the overarching objective to figure out if financial stability regulation is sufficiently powerful to change the incentives for firms and reduce significantly their carbon footprints.
Importance for society
Climate change is one of the most pressing problems of humanity. And yet the carbon emissions have not decreased but increased since the turn of the century. The present project presents a novel approach to achieve a global reduction of carbon emissions by harnessing the power of financial regulation. We will concentrate on the challenges to make this approach work, as well as on the opportunities it presents.
Overall objectives
The different work packages have the objective, first to establish if the instrument we propose is necessary and viable, and then what it takes to be used. In WP1, we study a theoretical model for network formation under financial contagion risk. We also study the legal viability and opportunity of the policy. In WP2 we explore the impact of the large uncertainty about the effects of climate change on the mindset of citizens and thus the likelihood that regulations are enabled. In WP3 we study the transmission of social attitudes and social norms into the decision processes of legislators and regulators.
This project had the overarching objective to figure out if financial stability regulation is sufficiently powerful to change the incentives for firms and reduce significantly their carbon footprints.
Importance for society
Climate change is one of the most pressing problems of humanity. And yet the carbon emissions have not decreased but increased since the turn of the century. The present project presents a novel approach to achieve a global reduction of carbon emissions by harnessing the power of financial regulation. We will concentrate on the challenges to make this approach work, as well as on the opportunities it presents.
Overall objectives
The different work packages have the objective, first to establish if the instrument we propose is necessary and viable, and then what it takes to be used. In WP1, we study a theoretical model for network formation under financial contagion risk. We also study the legal viability and opportunity of the policy. In WP2 we explore the impact of the large uncertainty about the effects of climate change on the mindset of citizens and thus the likelihood that regulations are enabled. In WP3 we study the transmission of social attitudes and social norms into the decision processes of legislators and regulators.
Work Package 1
"Network formation and heterogeneous risks" Joint with Piero Gottardi.
We study a new model to study the effect of contract externalities due to climate change that arise through shock transmission. We model a financial network where financial intermediaries enjoy direct and indirect benefits from linking with one another. Brown firms benefit from having a connection with a bank, but they are a cost to both direct and indirect connections. In efficient networks the intermediaries should form large, connected components with very few brown firms attached. The equilibrium networks, on the other hand, have many more brown firms attached, they are core-periphery structures, and components are also smaller than the efficient ones. We also study extensions with heterogenous "brown" risks," with diversity in the costs to intermediaries firms of linking with brown firms, and with incomplete information.
“Central Banks and Climate Change. Fit, Opportunity and Suitability in the Law and Beyond.” Joint with David Ramos and Ángel Sánchez.
The recent shift in attitudes of central banks to climate change has resulted in an often-confusing mix of views for and against central banks’ active role in climate change, which paint such role as (un)desirable or (i)legal, raising daunting legal (and non-legal) questions. In this paper we propose a methodology to analyse the problem, by dividing the arguments in three different types: arguments of “fit” that analyse whether central banks can tackle climate change, in light of their mandates; arguments of “opportunity” that analyse when central banks may, or should, act; and arguments of “suitability” that analyse how central banks may (and may not) intervene. A large part of the discussion is clarified by distinguishing between these three aspects.
Work Package 2
"The effect of ambiguity in strategic environments: an experiment." Joint with Pablo Brañas-Garza, María Paz Espinosa y Diego Jorrat.
We experimentally study a game in which success requires a sufficient total contribution by members of a group, as in climate change. There are significant uncertainties surrounding the chance and the total effort required for success A theoretical model predicts higher contributions under ambiguity than under risk. However, in a large representative sample of the Spanish population (1,500 participants) we find that the average treatment effect of ambiguity on contributions is zero. The main significant interaction with the personal characteristics of the participants is with risk attitudes, and it increases contributions. This suggests that policymakers concerned with ambiguous problems (like climate change) do not need to worry excessively about ambiguous uncertainty.
Work package 3
"The Interactions of Social Norms about Climate Change: Science, Institutions and Economics". Joint with Manu García, David Ramos Muñoz, Angel Sánchez
We study the evolution of interest about climate change between different actors of the population, and how the interests of those actors affect one another. We find large swings over time of said interest for the general public by creating a Climate Change Index for Europe and the US (CCI) using news media mentions. The general interest science journals and policymakers have a steadier interest, although policymakers get interested much later. Central bankers’ interest was low until recently, but in the last three years, it has increased massively.
"Norms and the evolution of leaders’ followership". Joint with Esther Hauk
In this paper we model the interaction between leaders, their followers and crowd followers in a coordination game with local interaction, a strategic structure reminiscent of the incentives for climate abatement. The existence of leaders and their charisma for followers, plus the local interaction, which leads to clustering, is crucial for the survival of the Pareto dominant actions (think of them as intense climate abatement).
Measures to exploit and disseminate the project results
In line with what I wrote in the grant proposal, I will submit the working papers to top Economics and interdisciplinary journals. In addition, all the research has been presented extensively in department seminars and workshops around Europe.
Proposed measures to communicate the project activities to different target audiences
During the last two years, I have written extensively in the blog Nada es Gratis (one of the most read ones in Spanish) about the topics of the project (climate change and regulation).
I was awarded the King Jaume I prize in Economics last year. This is perhaps the most prestigious academic prize one can get in Spain, and as a consequence there is a lot of media attention on the awardees. I profited from it to talk about my research.
"Network formation and heterogeneous risks" Joint with Piero Gottardi.
We study a new model to study the effect of contract externalities due to climate change that arise through shock transmission. We model a financial network where financial intermediaries enjoy direct and indirect benefits from linking with one another. Brown firms benefit from having a connection with a bank, but they are a cost to both direct and indirect connections. In efficient networks the intermediaries should form large, connected components with very few brown firms attached. The equilibrium networks, on the other hand, have many more brown firms attached, they are core-periphery structures, and components are also smaller than the efficient ones. We also study extensions with heterogenous "brown" risks," with diversity in the costs to intermediaries firms of linking with brown firms, and with incomplete information.
“Central Banks and Climate Change. Fit, Opportunity and Suitability in the Law and Beyond.” Joint with David Ramos and Ángel Sánchez.
The recent shift in attitudes of central banks to climate change has resulted in an often-confusing mix of views for and against central banks’ active role in climate change, which paint such role as (un)desirable or (i)legal, raising daunting legal (and non-legal) questions. In this paper we propose a methodology to analyse the problem, by dividing the arguments in three different types: arguments of “fit” that analyse whether central banks can tackle climate change, in light of their mandates; arguments of “opportunity” that analyse when central banks may, or should, act; and arguments of “suitability” that analyse how central banks may (and may not) intervene. A large part of the discussion is clarified by distinguishing between these three aspects.
Work Package 2
"The effect of ambiguity in strategic environments: an experiment." Joint with Pablo Brañas-Garza, María Paz Espinosa y Diego Jorrat.
We experimentally study a game in which success requires a sufficient total contribution by members of a group, as in climate change. There are significant uncertainties surrounding the chance and the total effort required for success A theoretical model predicts higher contributions under ambiguity than under risk. However, in a large representative sample of the Spanish population (1,500 participants) we find that the average treatment effect of ambiguity on contributions is zero. The main significant interaction with the personal characteristics of the participants is with risk attitudes, and it increases contributions. This suggests that policymakers concerned with ambiguous problems (like climate change) do not need to worry excessively about ambiguous uncertainty.
Work package 3
"The Interactions of Social Norms about Climate Change: Science, Institutions and Economics". Joint with Manu García, David Ramos Muñoz, Angel Sánchez
We study the evolution of interest about climate change between different actors of the population, and how the interests of those actors affect one another. We find large swings over time of said interest for the general public by creating a Climate Change Index for Europe and the US (CCI) using news media mentions. The general interest science journals and policymakers have a steadier interest, although policymakers get interested much later. Central bankers’ interest was low until recently, but in the last three years, it has increased massively.
"Norms and the evolution of leaders’ followership". Joint with Esther Hauk
In this paper we model the interaction between leaders, their followers and crowd followers in a coordination game with local interaction, a strategic structure reminiscent of the incentives for climate abatement. The existence of leaders and their charisma for followers, plus the local interaction, which leads to clustering, is crucial for the survival of the Pareto dominant actions (think of them as intense climate abatement).
Measures to exploit and disseminate the project results
In line with what I wrote in the grant proposal, I will submit the working papers to top Economics and interdisciplinary journals. In addition, all the research has been presented extensively in department seminars and workshops around Europe.
Proposed measures to communicate the project activities to different target audiences
During the last two years, I have written extensively in the blog Nada es Gratis (one of the most read ones in Spanish) about the topics of the project (climate change and regulation).
I was awarded the King Jaume I prize in Economics last year. This is perhaps the most prestigious academic prize one can get in Spain, and as a consequence there is a lot of media attention on the awardees. I profited from it to talk about my research.
As mentioned in the proposal, the objective in this line was to “take the lead in a very important field, with gigantic consequences for the future of humanity.” In this respect, I have already led a team that prepared an ERC Synergy proposal that reached the second stage. I also led a consortium of universities and disciplines (economics, law, political science, psychology, sociology) for a Green New Deal project.
Wider societal implications.
From WP1 we learn that financial regulators ought to be interested in climate change, because of the disparity between social and equilibrium behavior we uncover. And we also show that there are good legal reason why they can do so.
From WP2 we learn that the uncertainty surrounding climate change need not decrease contributions to abatement effort and may in some cases increase it.
From WP3 we learn that social norms have a definite impact in the preoccupation towards climate change, but that this varies dramatically across sectors. We also learn that leadership is important for the transmission of social norms, and the leaders for positive transformation need to be nurtured for this reason.
Wider societal implications.
From WP1 we learn that financial regulators ought to be interested in climate change, because of the disparity between social and equilibrium behavior we uncover. And we also show that there are good legal reason why they can do so.
From WP2 we learn that the uncertainty surrounding climate change need not decrease contributions to abatement effort and may in some cases increase it.
From WP3 we learn that social norms have a definite impact in the preoccupation towards climate change, but that this varies dramatically across sectors. We also learn that leadership is important for the transmission of social norms, and the leaders for positive transformation need to be nurtured for this reason.