Transition to a zero carbon economy is fundamental challenge, says Bank of England Governor

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.

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A shift in temperature—the financial challenge of a zero carbon economy by Tim Jackson and Andrew Jackson, Centre for the Understanding of Sustainable Prosperity, (CUSP), July 2, 2019

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.

• It demands the replacement of entire technologies, supply chains and infrastructures within timescales considerably shorter than the average asset life of the existing investments.
• Replacement will require directed (or incentivized) investment at a scale usually seen during periods of war or rapid urbanization, rather than at a scale typical of mature, post-industrial economies.
• It will also entail widespread changes in the behaviours of households, consumers, producers, investors, shareholders and savers that go well beyond any historically accepted ‘normal’.

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 …

• The potential disruption to financial markets is enormous, in part because of the high market value of those sectors most at risk of asset stranding. But the risks are not confined to firms in the fossil fuel sectors.
• Handled badly, jobs will be lost,
• financial assets will decrease in value,
• debts will suffer default and governments will lose an important source of revenue.
• The reduction in asset prices will have a negative effect on the consumption spending of asset owners, with potential knock on effects for aggregate demand.
• Countries in which fossil fuel firms raise a significant amount of capital—such as the UK—are likely to be particularly exposed.

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.

SEE ALSO

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?

• We’re not likely to grow the economy AND mitigate the Sixth Mass Extinction and climate change;
• We’re not likely to grow the economy by getting rid of the bad fuels and replacing them with rebuildables [renewables];
• We’re not likely to choose to leave fossil carbon in the ground because it’s so tethered to our experiences, our life standards, our wages, our profits, our growth, the cheap stuff that we buy; and
• Governments are not likely to embrace limits to growth before limits to growth are well past.”

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