But will the Governor’s proposal to “rebuild macroeconomics” really lead to our salvation? Or am I missing the point?
No 2489 Posted by fw, July 10, 2019
“The most fundamental challenge to the finance sector that we face is the need to support the transition to a carbon neutral economy, argued Mark Carney, Governor of the Bank of England, in his annual speech to the Lord Mayor’s banquet this year. Indeed, he said, it is existential. Carney has been a long-time advocate of the need to take seriously the ‘transition risks’ associated with climate change, pointing out that by the time they become fully apparent, it may already be too late to mitigate them. His Mansion House speech goes further than anything he has said before, committing the Bank to carrying out a robust ‘stress test’ of the resilience of the UK economy against different ‘climate pathways’, to be completed before the end of 2021. It will be ‘the first of its kind to integrate climate scenarios with macroeconomic and financial models’.” —Tim Jackson and Andrew Jackson
Prof Tim Jackson is Director of CUSP at the University of Surrey. He was for seven years economics commission on the UK Sustainable Development Commission, where his work culminated in the publication of his controversial and ground-breaking book Prosperity without Growth. Dr Andrew Jackson is a CUSP research fellow with a background in economics and climate finance. He has a PhD on stranded assets and has written extensively on the nature of money and monetary systems.
“Easiest and simplest path to keeping life recognizable is to actually make the changes that the physics demands that we do.” —Dr. James Dyke, senior lecturer in Global Systems, University of Exeter.
Below is my repost of the article by Tim Jackson and Andrew Jackson, with my added subheadings. Alternatively, read their piece on the CUSP website by clicking on the following linked title.
Climate emergency demands a wholescale shift away from fossil fuels. Tim Jackson and Andrew Jackson reflect here on the emerging concept of ‘transition risk’, a key element in the Bank of England’s response to climate change, and outline the challenges inherent in understanding and modelling it [transition risk].
Transitioning to a carbon neutral economy is the most fundamental challenge the financial sector faces
The most fundamental challenge to the finance sector that we face is the need to support the transition to a carbon neutral economy, argued Mark Carney, Governor of the Bank of England, in his annual speech to the Lord Mayor’s banquet this year. Indeed, he said, it is existential.
Waiting for risks associated with climate change may be too late to mitigate them
Carney has been a long-time advocate of the need to take seriously the ‘transition risks’ associated with climate change, pointing out that by the time they become fully apparent, it may already be too late to mitigate them. His Mansion House speech goes further than anything he has said before, committing the Bank to carrying out a robust ‘stress test’ of the resilience of the UK economy against different ‘climate pathways’, to be completed before the end of 2021. It will be ‘the first of its kind to integrate climate scenarios with macroeconomic and financial models’.
Climate scientists agree that averting climate breakdown requires transition to zero carbon economy
Carney’s speech represents a serious shift in the temperature of debate around climate finance. It is absolutely aligned with the spirit of our times. Climate scientists now agree that averting climate breakdown requires a whole-scale transition of the economy away from fossil-fuels. Challenged by the school strikes and activism on our streets, the UK Parliament has formally declared a ‘climate emergency’. Government has committed itself to adopting a ‘net zero’ target for greenhouse gas emissions by 2050.
Developed countries should be adopting earlier net zero targets
Given the historical responsibility for climate change, and the need for economic development in the poorest countries in the world, there is a very strong argument that developed countries should be adopting earlier targets and several developed economies have already done so, some as early as 2035.
Extinction Rebellion calls for UK to reduce carbon emissions to zero by 2025
Extinction Rebellion is arguing that the UK should reduce carbon emissions to zero by 2025 — and in the face of everyone exclaiming that this is impossible, is calmly recruiting academics, NGOs and policy-makers to figure out how it can be done.
By any account the transition is a formidable challenge.
To meet net-zero targets, almost two thirds of fossil fuels reserves will have to be left in the ground
These three features of the transition — rapid structural change, massive investment shifts and ‘post-normal’ behaviours — are exactly where Carney’s ‘transition risks’ are situated. Take the risk associated with ‘stranded assets’ as an example. If net-zero targets are to be met, almost two thirds of the proven fossil fuels reserves will have to be left in the ground. One study found that up to $2 trillion of capital expenditures are at risk of stranding in the oil, gas and coal sectors alone.
Consider the magnitude of the risks of transition failure …
Carrying out robust stress test of UK economy poses challenges to conventional macroeconomics
All of this underlines Carney’s evident concern. But his aim of carrying out a robust stress test of the UK economy remains a substantial undertaking. In fact, it poses exactly the sort of challenges to conventional macroeconomics that the ESRC’s Rebuilding Macroeconomics network was established to address. The over-reliance on equilibrium assumptions, the predominance of rational ‘representative agents’ and the relative neglect of the dynamics of the financial system: all of these factors contributed to the blindness of policy and the shortsightedness of finance in the run-up to the 2008 financial crisis. They remain unhelpful in attempts to understand transition risk.
But will the Governor’s proposal to rebuild macroeconomics really lead to our salvation? Or am I missing the point?
These are some of the reasons why Rebuilding Macroeconomics has now awarded funding to the Universities of Surrey and Sussex to develop a framework for addressing transition risk. Bringing together distinct approaches at the forefront of economic thinking—including Agent Based Modelling (ABM) and Stock-Flow Consistent (SFC) modelling—the Modelling Transition Risk (TRansit) project will develop a macroeconomic framework capable of mapping the complex, dynamic, nonlinear channels through which transition risk impacts on the economy.
TRansit is not just an academic exercise in creating a more heterodox macroeconomics. It is a vital component in the kind of inquiry that Mark Carney has just set in motion for the UK.
My comment to CUSP Carney article by Tim Jackson
“By any account the transition is a formidable challenge.” –Tim Jackson
There appears to be an assumption that a successful transition is possible. Is that because so few understand the complex nature of the human predicament?
First, the complexities of the existential crises we face are not well understood; Second, if the research findings of atmospheric physicist Tim Garrett are right (and so far his testable hypothesis has not been rejected), humanity is caught in a double-bind ending in the global collapse of the economy and civilization within decades; Third, who exactly has the expertise to lead ‘a global effort’ to resolve the ‘crises’ (it’s not just a ‘climate crisis’); Fourth, Dr. Nate Hagens, developer of a systems synthesis approach to the human predicament, integrates human behaviour, energy, money into this superorganism, emergent dynamic of how humans are currently functioning. … Under this framing, viewing humanity as a superorganism, what is NOT likely to happen?
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