The Unassuming Economist

From a new IMF working paper by Nooman Rebei and Rashid Sbia:

“This paper documents the determinants of real oil price in the global market based on SVAR model embedding transitory and permanent shocks on oil demand and supply as well as speculative disturbances. We find evidence of significant differences in the propagation mechanisms of transitory versus permanent shocks, pointing to the importance of disentangling their distinct effects. Permanent supply disruptions turn out to be a bigger factor in historical oil price movements during the most recent decades, while speculative shocks became less influential.”

From Social Europe post by Monique Goyens:

“In the latest contribution to our series on ‘just transition’, Monique Goyens argues that it must address the people finding it hard to pay their energy bills.

The task of moving to a carbon-neutral society is herculean, but the benefits won’t just include saving the planet. There are also long-term economic gains, even for the most hard-up.

An estimated 50 million around the European Union struggle to keep their homes warm and pay their energy bills. Many suffer from the same problems: poorly insulated homes, ill-suited tariffs, insufficient advice on how to save energy or a combination of all three.

The lowest income earners in the EU spend an increasingly large share of their budget on energy—rising from 6 per cent in 2000 to 9 per cent in 2014. In the short term, for this group, it makes more sense to use energy more efficiently than to invest in solar panels, heat pumps or pellet stoves. It will also deliver faster savings.

The choice should not however be between having a warm home and having food on the table. In making their homes more efficient, people consume less energy to heat their living space and can more easily pay their bills.

But getting people to take action can be complex. Those at risk of energy poverty might feel overwhelmed and prioritise solving other problems, such as warmer clothing or food. Often, they might not know what solutions are out there.

For governments and energy advisers to upload advice about insulation to a website isn’t enough. That advice needs to get out to people. Human contact also helps.”

Continue reading here.

From AEI:

From a new VoxEU post:

“Central banks have been called on to contribute to fighting climate change. This column presents a framework for thinking about the issue and identifies some major trade-offs and choices. It argues that climate should be a major part of risk assessments and that capital ratios could be used in a proactive way by applying favourable regimes to ‘green’ loans and investments. It also suggests that central banks may want to take several climate change-related aspects into account when designing and implementing monetary policies. However, the central bank should retain absolute discretion to interrupt any action if its first-priority objective – price stability – were to be compromised.”

“The big question, however, is whether central banks can use their monetary instruments to actively promote the fight against climate change (Honohan 2019). Over the last decade, central banks have significantly expanded their balance sheets, often by a factor of five or ten. In many countries, those balance sheets are now commensurate to the size of the national economy.  With such an imprint on the economy and financial markets, central banks could take a more proactive approach to financing the climate transition.

Two possibilities come to mind, both without significant changes to the current operational framework:

• Reorient their asset purchases towards ‘green’ securities
• Modulate haircuts applied to different kinds of collateral used in refinancing operations, thus creating an incentive to detain some and offload others. “

From the European Central Bank:

“This article provides evidence that economies receiving more funding from stock markets than credit markets generate less carbon. Increasing the equity financing share to one-half globally would reduce aggregate per capita carbon emissions by about one-quarter of the Paris Agreement commitment. Our findings call for supporting equity-based initiatives rather than policies aimed at decarbonising the European economy through the banking sector.

Financial markets and global warming

The 2015 Paris Climate Conference firmly put at the heart of the debate on environmental degradation a sector of the economy that may surprise some readers: finance. Accordingly, the leaders of the G20 stated their intention to fund low-carbon infrastructure and other climate solutions by scaling up so-called green finance initiatives. Key examples are the burgeoning market for green bonds, whose issuance reached USD 48 billion in the first quarter of 2019^[2], and the creation of a green credit department by the largest financial institution in the world, the Industrial and Commercial Bank of China.

Somewhat paradoxically, the interest in green finance has also laid bare our limited understanding of the relationship between traditional finance and the environment. Yet it is important for us to understand that relationship, because most of the global transition to a low-carbon economy will need to be funded by the private financial sector if international climate goals are to be met on time (UNEP, 2011). Are expanding financial markets detrimental to the environment? Do they cause harm, for instance, by fuelling economic growth and the concomitant emission of pollutants? Or, do they steer economies towards sustainable growth by favouring green sectors over so-called brown ones? And is there a difference in this regard between credit markets and equity markets? Do they have the same impact on environmental degradation, or does it make economic sense to stimulate one segment of the financial system at the expense of the other?

We explore those questions in this article, which is based on a recent ECB working paper (De Haas and Popov, 2019). Here, as in the working paper, we present novel evidence that, when it comes to addressing climate change, not all financial markets are created equal. As it turns out, stock markets are superior to banks in decarbonising the economy. As we show, for a given level of economic development, financial development, and environmental protection, economies generate fewer carbon emissions per capita if they receive relatively more of their funding from stock markets than from credit markets.”

Continue reading here.