ABSTRACT
The climate-induced financial instability hypothesis, developed in a context of growing concern about the economic consequences of the environmental crisis, expresses possible imbalances in the monetary and financial sides of the economic system promoted by climate change. This article aims to make a theoretical analysis and an empirical investigation of this hypothesis. To this end, it was sought: i) describe the channels through which climate change destabilizes financial systems; ii) identify the main responses of central banks; iii) verify the validity of this hypothesis, using the GMM method in a panel data structure formed by a sample of 90 countries in the period from 2002 to 2020. The results suggest that in recent years, climate change has increased financial volatility, while central banks have remained committed to conventional monetary policies.
KEYWORDS: Climate-induced financial instability; central banks; climate change
RESUMO
A hipótese da instabilidade financeira induzida pelo clima, desenvolvida num contexto de crescente preocupação com as consequências econômicas da crise ambiental, expressa possíveis desequilíbrios nos lados monetário e financeiro do sistema econômico promovidos pelas alterações climáticas. O objetivo deste artigo é fazer uma análise teórica e uma investigação empírica desta hipótese. Para tal, procurou-se: i) descrever os canais através dos quais as alterações climáticas desestabilizam os sistemas financeiros; ii) identificar as principais respostas dos bancos centrais; iii) verificar a validade desta hipótese, utilizando o método GMM numa estrutura de dados em painel formada por uma amostra de 90 países no período de 2002 a 2020. Os resultados sugerem que, nos últimos anos, as alterações climáticas aumentaram a volatilidade financeira, enquanto os bancos centrais permaneceram comprometidos com políticas monetárias convencionais.
PALAVRAS-CHAVE: Instabilidade financeira induzida pelo clima; bancos centrais; alterações climáticas
1. INTRODUCTION
Conventionally, central banks seek to pursue a policy based on the theoretical precepts of the so-called New Macroeconomic Consensus (NMC), built on the synthesis of ideas from the new classical macroeconomics (rational expectations, microfundamentals and maximization of intertemporal utility subject to budget constraints), and from neo-Keynesian macroeconomics (information asymmetry, price rigidities and short-term wages, menu costs and imperfect competition). The theoretical framework of the NMC states that the main task of central banks is to maintain monetary and financial stability in the long run, for which it recommends that the monetary authority: i) be autonomous/independent; (ii) adopt the inflation targeting regime and; iii) follow a monetary rule, the most famous of which is the Taylor Rule, which calibrates the basic interest rate according to deviations from inflation and output (Rochon et al., 2022; Arestis; González-Martínez, 2015).
However, amid the global and systemic repercussions of the subprime crisis in 2008 and the coronavirus crisis in 2019, intensified by the high degree of integration of financial markets and capitalist economies, central banks seem to have concluded that conventional monetary policy, as advocated by the NMC, would be an insufficient response and falls short of what is necessary. The recommendations that aimed to guarantee the free market and ensure a supposed market neutrality, were explicitly abandoned in favor of markedly interventionist policies in the economic domain for the recovery of the cycle. In response to both crises, several central banks in developed economies have used unconventional monetary instruments, such as quantitative easing (Paula; Saraiva, 2023).
However, another crisis has already manifested itself on the immediate horizon, perhaps with even more intense and long-lasting consequences: the climate crisis. Between the years 2000 to 2019, 7348 environmental disasters were recorded worldwide, together these disasters were responsible for the loss of 1.23 million human lives, in addition to indirectly affecting another 4.2 billion people, culminating in a monetary cost of about 2.97 trillion dollars (UNDRR, 2020). By the year 2050, climate change could be responsible for 14.5 million deaths and cause economic losses of around $12.5 trillion (WEF, 2024). In addition, possibly by the end of the century, the average temperature of the planet will rise by 3ºC, so climate disasters will become more common and more intense (UNEP, 2021).
Since 1850, the average increase in the Earth’s temperature has been more rapid, intensified by the Industrial Revolution. If, on the one hand, in the last 200 years, technological progress has led to improvements in the standard of living and allowed a significant increase in the size of the population, reducing old problems such as hunger; on the other hand, it has also greatly expanded greenhouse gas (GHG) emissions from the increasing use of fossil fuels, as well as eroding terrestrial biodiversity. The climate crisis is, therefore, the result of human action and its current pattern of production and consumption (IPCC, 2021).
Against this backdrop, monetary policy may have been a key part of worsening ecological conditions. By interfering with asset prices and their rates of return, monetary policy directly influences capital allocation. Given that current monetary policy has underestimated the risks arising from the environmental crisis, there is a bias in favor of carbon-intensive activities, which hinders the decarbonization of the economy (Monnin, 2018). Apparently, climate change has already affected macroeconomic stability with repercussions on the financial side of the economy that can lead to contagion on the real side, in what has been called Climate-Induced Financial Instability, that is, the ability of the current climate crisis to operate macroeconomic imbalances.
In the face of the severe crisis and its potential effects on the stability of the financial system, many have advocated changes to the current policies of central banks, arguing that they should be less “conventional” and more flexible, just as they were in dealing with the subprime and coronavirus crises (Guttman, 2022; Fontana; Sawyer, 2015). Some even advocate those monetary authorities adopt a sustainability mandate to, together with other agents, respond to the crisis and assist in the transition to a more sustainable production and consumption model (Volz, 2017).
However, there seems to be a relative consensus - in the Keynesian sense1 - in favor of maintaining the current monetary policy framework that neglects the results of the environmental crisis. Another factor that hinders the response of central banks is the scarcity of empirical studies that verify the validity of the Climate-Induced Financial Instability hypothesis, thus constituting a gap in the literature on the subject.
Inserted in this theme, the present work aims to analyze the relationship between environmental degradation and financial instability. To this end, the article uses two complementary strategies to the analysis. The first, of an expository nature, recovers, through a literature review, the main theoretical elements on the interrelations between financial instability and climate change. The second, empirical, builds an econometric model that estimates the effects of climate change on inflation, used as a proxy for financial instability, using the Generalized Method of Moments (GMM). Starting from the hypothesis that climate change is one of the determinants of price volatility and, therefore, should be considered in the reaction function of central banks.
In addition to this introduction, the article is divided into two more sections. The second section recovers the thesis of Climate-Induced Financial Instability and the channels through which climate change affects the stability of the financial system and then lists the main greening initiatives of central banks. The third section exposes the econometric method used in panel data analysis, the period, and the group of selected countries and also discusses the results found. Finally, the final considerations are presented.
2. FROM THE CLIMATE CRISIS TO THE POTENTIAL FINANCIAL CRISIS
For a long time, environmental discussions were confined to the real side of the economy, leaving monetary and financial elements in the background. However, due to the worsening consequences of the environmental crisis, the most recent research has focused on the intricate relationships between financial instability and climate change, in what has been coined as the climate-induced financial instability hypothesis. This section discusses the fundamentals of this hypothesis and lists the main greening initiatives promoted by the world’s major central banks.
2.1. Theoretical foundations of the Climate-Induced Financial Instability hypothesis
Climate change has become a potential risk that can compromise the stability of the financial system through some channels of transmission and amplification, in what has been didactically called the Climate-Induced Financial Instability hypothesis, a term coined by Lamperti et al. (2019). According to which, the worsening of climate change can negatively impact the stability of financial systems, the maintenance of which is one of the functions of central banks.
At the root of Climate-Induced Financial Instability is climate uncertainty that cannot be built into asset prices, nor calculated to compare it to the cost of inaction. In addition, it has a virtually unknown distribution of probabilities related to climatic events (Collins, 2019). And it also has the potential to engender a “climate Minsky moment”, a moment in which the exposure of the financial system to growing climate uncertainty could generate a sudden revaluation of asset prices, triggering a deflationary movement with repercussions on the real side of the economy (Miller; Dikau, 2022).
The issue has been neglected, as it is expected that the consequences of the environmental crisis will fall only on future generations, representing a disincentive for the current generation to face the problem at the present time. In addition, central banks are committed to keeping inflation rates within a target range and favor short-term monetary policies, with a horizon of 2 or 3 years, in a clear mismatch with decarbonization programs that require long-term measures. There are at least three channels through which climate change can jeopardize financial stability: the physical risk channel, the liability risk channel, and the transition risk channel (Carney, 2015).
The physical risk channel is related to extreme weather events - increasingly frequent and severe - that can cause damage to property, infrastructure and tangible assets. Such events directly impact the production and distribution of food and the supply of drinking water, generating crop losses and stimulating migratory flows, with serious consequences for human and non-human health, since the increasing average temperature warming may also be associated with increased mortality and morbidities. Shocks from climate change can engender, on the supply side, losses in food production, labor supply, and capital stock, and, on the demand side, a reduction in the level of investments and household consumption (Campos, 2021).
Thus, the physical risk channel can reduce agricultural productivity and disrupt global supply chains, which would consequently impact price levels, making them more volatile. In addition, they can still change the prices of a range of financial assets and increase the liquidity premium linked to them, due to the growth of uncertainty associated with rates of return (FSB, 2020). They can also reduce aggregate demand, impacting the balance sheets of various segments and increase the costs of borrowing, reducing the overall liquidity of the system (Breitenfellner; Pointner, 2021).
Table 1 presents estimates of global economic losses from climate catastrophes for the period from 1980 to 2019, divided into four groups and four sub-periods. There has been a sharp increase in these losses, which have almost quadrupled in recent decades. In addition, the greatest growth was seen in economic losses due to meteorological events, those related to tropical cyclones, prolonged droughts and atypical torrential rains.
A second means by which climate change can increase the instability of the financial system is the so-called liability risk channel and is related to the possibility of future claims by victims of extreme weather events, in the form of reparations and indemnities, which can affect insurance companies and carbon-intensive companies. The insurance industry is especially vulnerable, as the increased frequency of weather disasters will consequently culminate in increased claims for insurance contract premiums, prompting insurers to reconsider their assessments of the value of client companies, the premium they are willing to pay, and policy prices. In the worst-case scenario, there could be a reduction in the insurers’ customer base and possible bankruptcies (Carney, 2015; FSB, 2020).
As the environmental crisis worsens, the supply of insurance coverage in some sectors of the economy - the most carbon-intensive - may simply disappear, transferring all the risks involved in the business to the balance sheets of this segment, which could make them unviable (FSB, 2020). Despite the potential destabilizing effects on the insurance industry, the state of the art of regulation has not yet advanced enough to include possible sequelae of the environmental crisis in its forecasting and risk models2 that still remain closely linked to the short term. As a result, the insurance industry misses an excellent long-term opportunity by neglecting to support the green transition (Carney, 2015).
In addition to the insurance sector, liability risks also manifest themselves in the possibility of judicialization of the consequences of climate change. Victims of severe events can take legal action against companies directly responsible for the worsening of environmental consequences by demanding compensation. Such lawsuits can erode the reputational assets of the firms involved, reducing their market value and compromising the stability of the system (FSB, 2020). Currently, there are about a thousand collective actions related to climate change in 25 countries (Guttman, 2022).
Finally, there is still the transition risk channel, which stems from changes in economic policy, technological patterns, and consumer behavior during a reform program aimed at building a low-carbon economy, and which may affect macroeconomic conditions in the countries most involved in the transition. The search for alternative energy sources to replace the energy matrix centered on fossil fuels can compromise several sectors - oil, transportation, construction, expansive agribusiness - which are the dynamic basis of many economies, leading to short-term disruptions with gigantic destabilizing potential (Guttman, 2022).
Until 2022, the fossil fuel sector was directly responsible for more than 10% of world trade and represented about 10% of global investment (WDI, 2024), which means that an abrupt dismantling of the sector, although beneficial from an environmental perspective, would entail high social and fiscal costs, such as the rapid growth of the unemployment rate and the fall in the revenue of many governments. Therefore, although the transition to a more sustainable production and consumption model is urgent, an abrupt and uncoordinated transition could erode financial and economic stability, which favors advocates of smooth and gradual change3 (Campos, 2021).
Transition risks also alter expected cash flows, as once a decarbonization program implements new technologies, regulatory changes, and new carbon taxes, the landscape upon which investment decisions have already been made transforms substantially. As a result, the value of assets, as well as their risk and return ratios, change, so that some companies may realize that the expected cash flows from their assets no longer meet their debt commitments, promoting instability. The transition can also create a set of stranded assets, i.e., a number of resources that no longer find use in a low-carbon economy, because they are highly carbon-intensive (Breitenfellner et al., 2019).
Physical risks tend to affect all actors in the economy, while liability and transition risks would affect carbon-intensive companies the most. It is also worth noting that the three risk channels feed each other through feedback loops - which arise when actions taken by self-interested individual agents interact in multiple ways amplifying positive and negative outcomes4 - among financial systems or between the financial system and the real economy, engendering a movement in the same direction among asset prices, which could leave investors highly exposed to climate change shocks, even those operating with a highly diversified portfolio strategy (FSB, 2020).
Therefore, climate change has generated economic shocks and increased uncertainty around the world, with implications for the movement of the prices of goods, services and financial assets, making them more volatile and creating an even more difficult scenario to model or predict. It is worth remembering that climate change is a trend and not a cyclical phenomenon, which has permanent and potentially overlapping effects and may even reduce the effectiveness of monetary policy. Therefore, it requires new tools (Breitenfellner et al., 2019).
2.2. The green responsibility of central banks
The risk channels and destabilizing factors arising from climate change described in the previous section place central banks at the center of the environmental discussion. After all, under the aegis of the NMC, maintaining the stability of the monetary and financial systems has been the primary task of central banks in most developed and emerging countries. Volz (2017) argues that to address climate change, central banks should adopt a sustainability mandate, i.e., in addition to their conventional tasks, such as maintaining liquidity and safety, monetary authorities should also have an environmental target, which could be done by explicitly integrating environmental targets into their set of objectives or, more implicitly, by using the institution to support other developing climate policies.
Many arguments are used to defend the incorporation of a sustainability mandate. Such as the well-known problem of Climate-Induced Financial Instability, and the channels through which climate change affects the stability of the financial system. Another favorable argument concerns the fact that commercial banks only aim for financial return, being able to allocate resources to socially and environmentally undesirable activities by ignoring the results of the projects they finance. Thus, if the market is structured in an incomplete manner and with asymmetric information, the Pareto-efficient result may not be achieved, so that private returns compete with social and environmental returns, which would require greater intervention (Volz, 2017; Dikau; Volz, 2019).
However, of the 135 central banks surveyed by Dikau and Volz (2021), only 12% have explicit sustainability mandates, while another 40% are required to support the policy priorities of governments committed to sustainable development goals. Indicating the low commitment that these institutions still have to the climate crisis - a crisis with planetary effects and that interferes with their traditional responsibilities. These institutions have chosen to interact at the international level in the search for climate solutions, using their experiences and network of contacts in the international monetary system to share strategies adopted in the environmental field.
In 2017, 83 central banks and financial supervisors committed to accelerating green finance and disseminating the sustainability mandate came together around the creation of the Network for Greening the Financial System (NGFS) - Brazil joined the initiative in 2020. Prior to that, in 2015, the same institutions had already created the Task Force on Climate-Related Financial Disclousures (TCFD), a working group for the preparation and dissemination of reports on financial risk related to climate change and the development of actions to increase the stability of the system (Volz, 2017; Koumbarakis, 2021).
However, there is still a lack of a clear global coordination initiative for the reorientation of the financial system towards the decarbonization of the economy. Thus, central banks around the world have adopted different strategies to face the consequences of climate change, but it should be noted that as different as these strategies are, many of them follow the same direction. Chart 1 summarizes the main policies adopted:
Observing Chart 1, it is possible to see that these are initiatives that aim to improve market signals, in a clear stimulus for private banks to internalize environmental issues in their daily activities, routinizing the process of greening the economy. This modus operandi seems to indicate that the improvement of disclosure standards would be enough to discipline the market and lead to an efficient management of environmental resources. Ameli et al. (2020) point out that this strategy is guided by the efficient markets hypothesis, according to which if risks are fully revealed, the financial system will respond rationally to the public interest5.
Such initiatives are based on the theoretical conceptions of NMC, a theory that has been criticized for its limitations and deficiencies, perhaps the most pressing of which is its complete absence from environmental discussions6. The NMC disregards any environmental issues, treating them as irrelevant to economic policy. Embedded within the theory is the hypothesis of perfect substitutability among factors of production, so that any problems of scarcity of natural resources would be easily solved by the greater use of another factor of production, capital or labor. Thus, from this theoretical perspective, the environment does not represent a limit to the production process, nor do the consequences of the climate crisis interfere in this process (Arestis; González-Martínez, 2015).
Another hypothesis of the NMC models is that of currency neutrality, according to which elements of the monetary and financial sides of the economy do not interfere (nor suffer interference) in the dynamics of the productive side, where all the “causes” of climate change are supposed to be isolated according to the dominant view. Therefore, assuming the currency as neutral makes the internal dynamics of the financial sector irrelevant in understanding the ecological results of the production process (Arestis; González-Martínez, 2015).
For these reasons, the NMC is unable to apprehend Climate-Induced Financial Instability; it is a theoretical framework that almost completely neglects the severity of the climate crisis, reducing economic policy to a mere improvement of market signals to internalize the costs of degradation.
3. EMPIRICAL RESULTS AND DISCUSSION
As discussed, climate change generates destabilizing macroeconomic effects, which can materialize in increased volatility in the price level, which makes inflation a good proxy for financial instability resulting from climate change. This section presents the empirical results of econometric estimations.
The estimation method used will be the generalized method of moments, better known by the acronym GMM (generalized method of moments), which has some advantages in relation to more traditional methods, including: i) it is a more general method, being able to estimate models that would already be estimated by other methods; ii) it can be used even when there is suspicion of problems involving endogeneity among the explanatory variables of the regression or when the number of moments is greater than the number of parameters that will be estimated; iii) it can control the presence of heteroscedasticity, endogeneity and autocorrelation that may arise in the model; and iv) it is recommended for the case of dependent variables that are influenced by their past values (Arellano; Bond, 1991; Roodman, 2009).
The analysis structure will be that of panel data, which includes time series (different years) with cross-sectional data (different countries). All data will be collected from the World Bank’s indicator database (WDI, 2024). The period covers the years 2002 to 2020, defined according to the criterion of data availability, While the sample encompasses a group of 90 countries, listed in Chart 2.
The model is specified in log-log form, to make it possible to analyze the elasticities between the independent variables and the dependent variable. In addition, time dummies have been added to control for global conditions that vary over time and affect the different countries in the sample. According to Roodman (2009), time dummies assume that there is no correlation among individuals, which is a key assumption for the autocorrelation test and the estimation of standard errors. However, for simplicity and convention the coefficients of the dummies will not be presented in the equations. Equation 1 details the basic structure of the estimated model:
Where inf is a proxy for financial instability, i.e., variation in the price level, and Deg is a proxy for environmental degradation, here we used the carbon dioxide emissions per capita, where β0 is the constant and εt is the error term of the regression. While Z it represents the control-type variables that aim to offer subsidiary explanations for the behavior of inflation in the analyzed period. They are: a solvency indicator (sol), a liquidity indicator (liq), a degree of trade openness indicator (open), a food production indicator (food), the exchange rate variable (exchange) and a middle-income indicator (inc). The focus of the investigation will be on the β3 coefficient, because once it is positive and significant, the hypothesis of Climate-Induced Financial Instability will be confirmed. Chart 3 describes the variables mentioned:
Figure 1 shows the recent trajectory of the model’s variable of interest, i.e., per capita carbon dioxide emissions. There is a significant growth in the period analyzed, demonstrating how year after year the volume of emissions that the global production system emits is increasing. It is also noteworthy that in the year following a major crisis - in the period analyzed there were two, the subprime crisis and the coronavirus crisis - emissions decreased due to the cooling of economic activity. It was precisely at these two moments that conventional monetary policies were abandoned.
Table 2 presents the results of the econometric estimates, where 7 different equations were estimated that vary according to the different controls that were introduced in the basic structure of the model. It is possible to see that all models indicate a positive and significant relationship between environmental degradation and financial instability, corroborating the hypothesis of financial instability induced by climate change, that is, the environmental crisis has become one of the sources of imbalance for the monetary and financial side of the economy in recent years, representing a new challenge for central banks and inflation control mechanisms.
These results further highlight the limits of the NMC as the main theoretical influence of the monetary policy developed by the various central banks around the world. The NMC, in addition to disregarding any concerns about the environmental outcomes of the economic process (Arestis; González-Martínez, 2015), neglecting the effects of capital allocation caused by monetary policy adjustments and quite possibly feeding a pro-carbon bias in the global financial system (Monnin, 2018), still proclaims the independence of the monetary authority, making it impossible for it to be used in a decarbonization project, and the use of the basic interest rate as the only instrument, narrowing new possibilities for action.
In addition to climate change, other factors also impact financial stability, which is why some control variables have been included. Liquidity and trade openness indicators are significant and negatively associated with price volatility, suggesting that countries with a higher degree of trade openness and better levels of liquidity tend to have greater room for action to maintain the balance of their monetary and financial systems. On the other hand, the exchange rate showed significance and a positive relationship with price volatility, while the solvency indicator was not significant.
As discussed in the previous section, climate change can increase the costs of borrowing by reducing the liquidity of the system, which means that such changes can erode the margin of protection that liquidity indicators provide for price volatility. Climate change can also potentiate the effects of exchange rate variation on macroeconomic instability and further disrupt trade flows and global value chains (Breitenfellner; Pointner, 2021). And also, to invert the role of trade openness, using it as a mechanism for the propagation of instabilities among countries, since climate-induced instability can have a contagion effect. A point that obviously deserves more attention in future research.
The average income indicator is significant and is negatively associated with changes in price levels. The middle-income variable has occupied a lot of space in the debates on financial instability and climate change, since the current high-middle-income countries have grown and developed at the expense of extensive environmental damage, a possibility that, due to the worsening of the environmental crisis, is no longer open to countries that are still considered developing. The Paris Agreement itself, signed in 2016, seems to recognize the limits that the need to decarbonize the economic system imposes on developing countries by advocating that high-middle-income countries finance development projects in emerging countries.
On the other hand, the food production index was significant and is positively related to the inflationary variation in the analyzed period, indicating the importance of the world food supply in the composition of the general price level. It is worth mentioning that the environmental crisis directly impacts agricultural production across the globe, as it impoverishes the air, water and soil, causes droughts, alters the average temperature of many regions and, consequently, interrupts harvests and reduces world supply. It is, therefore, a central element of the so-called physical risk pipeline of climate change-induced financial instability (Carney, 2015; FSB, 2020).
Finally, it is still necessary to verify the consistency of the GMM estimators, for which the instruments used in the model need to be valid. For this reason, Table 2 shows the Hansen’s test and the second-order autocorrelation test - AR (2). The first checks for over-identification of the instruments and has the null hypothesis that the model is correctly specified and the instruments are valid. If the coefficients of the Hansen test are less than 1, then the instruments of the models are valid. While the second test investigates whether there is a second-order serial correlation of the error term, more precisely it tests the hypothesis that the error term is not serially correlated (Arellano; Bond, 1991; Roodman, 2009).
Therefore, the results of the tests presented in Table 2 indicate that the instruments of the models are valid and that there is no second-order serial correlation in the error term. Thus, the results found are robust and it can be stated that the empirical research carried out here suggests the corroboration of the hypothesis of climate-induced financial instability, that is, climate change has become one of the factors that increase financial instability in the global economy.
4. CONCLUSIONS
This article aimed to analyze the Climate-Induced Financial Instability hypothesis from theoretical and empirical perspectives. This hypothesis refers to the possibility that the current climate crisis will have destabilizing macroeconomic effects, especially on financial systems. Considering that one of the main responsibilities of central banks is to maintain stability, climate change also poses a new challenge for monetary authorities.
From a theoretical point of view, at least three channels through which climate change can affect financial stability have been identified. The physical risk channel, referring to the consequences of extreme weather events that interrupt the flow of trade, destroys property and imposes a series of costs on insurers. The liability risk channel that increases legal-economic uncertainty, as it refers to the possibility of future claims by victims of climate catastrophes that may affect carbon emitters and extractors. It is the conduit for transition risks arising from a green transition programmed. Global economic losses caused by climate catastrophes estimated over the past four decades have grown by nearly 300 percent.
From an empirical point of view, the estimated model indicates the validity of the climate-induced financial instability hypothesis, i.e., for the period analyzed, climate change made price levels even more volatile. This is due to temperature variations, loss of biodiversity, impoverishment of natural resources, and other consequences of the environmental crisis, which interrupt trade flows, generate crop losses, and reduce work capacity and productivity, among many other effects. These are not temporary effects, on the contrary, climate change is a permanent and cumulative trend for the coming years.
These results have significant theoretical implications for the literature on the topic. The NMC, the main theoretical basis of conventional monetary policy, has dangerously neglected climate impacts on macroeconomic stability, especially on the balance of financial systems. In addition, the few central banks that have engaged with the issue have limited themselves to adopting policies to improve market signals, through certifications and labeling. These policies, however, are completely unrelated to a larger planning project aimed at decarbonizing the economic system.
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1
For Keynesians, conventions are informal institutions that are not subject to external sanctions, only reputational sanctions. Conventions form the set of socially shared mental constructs, they are projections of the present situation elaborated according to the general/average opinion of a group (see Dequech, 2011).
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2
It is noteworthy that climate change alters the hydrological and climatological patterns of various regions of the planet, making them more volatile, which poses an additional challenge for insurance agencies’ forecasting and risk assessment models (see FSB, 2020).
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3
However, recent reports and estimates suggest that the window of opportunity for a gradual and smooth transition has already been closed due to a lack of coordination and policy action, and with the rapidly worsening climate crisis, it would be necessary not to have a green transition but a green revolution, that is, an aggressive structural change in the current model of production and consumption in the very short term (see WEF, 2024; IPPC, 2021; UNEP, 2021).
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4
The 2008 crisis was an important example of a feedback loop. The fall in asset prices and the cooling of economic activity led banks to contract the supply of credit to reduce their exposure to the risks of new loans, which had the consequence of further reducing the level of economic activity.
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5
It should be noted that this strategy is based on the assumption that markets are unparalleled processors of information, so that the price system can reflect climate risk, internalizing environmental costs, as it adheres to the notion of climate risk, that is, with the idea that probable environmental consequences are subject to probabilistic calculation (see Christophers, 2017).
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6
The NMC has also been criticized for giving great relevance to insufficient evidence on the existence of a vertical long-term Philips curve and for ignoring the existence of banks and financial risks in the analysis it undertakes (see Arestis; González-Martínez, 2015).