A formal framework of the link between Finance, Growth and the Environment

1. Green Credit Guidance
A formal framework of the link between
Finance, Growth and the Environment
Giovanni Bernardo
Giorgos Galanis
New Economics Foundation
London

2. Outline
1.
2.
3.
4.
5.
6.
Why we need a new economic modeling
framework
Our approach
The basic model
How to include environmental variables
Simulations.
Contribution to the relevant literature.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

3. nef macro modeling
• nef has been developing a model which links growth, finance and
environment.
• We use a methodology called system dynamics to build theories
concerning the dynamic functioning of the system and run
numerical simulations of possible macro scenarios.
• This is an ongoing research project, but we feel the modeling tools
we have developed are already able to show some original results
and contribute to the current economic debate.
• In a previous presentation we have presented the way we model
the banking system (LINK), employing it to analyze the debate
between Krugman and Keen regarding debt and aggregate
demand (LINK) .
• In this presentation, we deal instead with the way we
include environmental variables in the core model.

4. A new modeling framework
• Understand the links between finance,
output, income distribution and
environment.
• Study the effects of different policies on the
above.
• Aim to influence discussions in both
academia and in policy making.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

5. Why we need a new modeling framework
 Conventional modeling framework treats:
Macroeconomic phenomena (such as output) and
microeconomic issues (such as finance) separately.
2. All kinds of markets as perfect such that prices clear to
ensure the full employment of resources. In this way
supply drives the economy:
1.



Does not take into account issues of inequality, unemployment etc.
Total spending on investment and climate mitigation is determined by
available savings.
Full capacity utilization of resources, including labour, raises questions
like: Will labour be fully employed if global warming significantly
reduces the level of output?
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

6. Why we need a new modeling framework
 Unconventional (Post) Keynesian Stock Flow Consistent (SFC)
models provide an integrated approach to finance, income,
production and wealth (Godley and Lavoie 2007).
SFC models:


Investment decisions are not dependent on savings decisions and
financial institutions are a key component of the modeling framework.
Economic factors are not working in full capacity and income and
wealth distribution has important effects on economic and financial
stability .
BUT there is no role of the environment.
 Environmental models which take into account issues like
employment (ex. E3MG, LOW GROW) do not take into account
the implications of the financial sector.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

7. General Framework
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

8. Real- Financial Interactions
(Main Assumptions)
•
•
•
•
•
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Savings do not lead to investment but it works the other way
round.
Investment decisions depend on the firms’ profits and on their
propensity to invest.
If the propensity to invest is higher than the current profits
then firms ask for loans.
Commercial banks create money when they extend a loan. This
amount of new money is destroyed when the loan is repaid.
Banks are not passive in extending loans as in most Post
Keynesian models.
Commercial banks extend loans based on their confidence on
the ability of the firms to repay the loans.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

9. How to include Environmental variables
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

10. Three strategies towards a low carbon
economy
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

11. Energy Use
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

12. Further Assumptions
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

13. Investment in Energy Efficiency and
in Renewable Energy
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

14. Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

15. Green Taxes
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

16. Simulations
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

17. Business as usual (BAU)
• This is our default
scenario: a process of
growth leading to a
long-run steady-state.
• Growth is driven by the
net creation of credit
(Credit Creation minus
Debt Repayment).
• Only a small percentage
of money are invested in
energy efficiency.
• No green taxes and no
GCG.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

18. Green taxes (GT)
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

19. Green Credit Guidance (GCG)
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

20. Green Taxes & Credit Guidance
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

21. Comparison: Output
• Output is the same as
in BAU and in GCG.
• This because the level
of credit creation is the
same, the difference
concerns the allocation
of the money.
• GT have a negative
effect in output.
• This effect is smaller
when GCG and GT
policies are combined
(as expected).
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

22. Comparison: GHG Emissions
• GCG has an effect to
cutting down GHG
emissions but without
having a decoupling
effect.
• GT have a faster
reduction to GHG
emissions and also
achieve decoupling.
• Decoupling is also
achieved with the
combination of the
two policies but in this
case the reduction of
the GHG emissions is
lower than in the GT
case.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

23. Exponential growth scenario
• This graph
represents the effects
of the combination
of both policies to
GHG emissions, Non
Renewable Energy
and Output.
• In the exponential
growth scenario, it is
impossible to
achieve a transition
to a low carbon
economy.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation

24. Concluding Remarks
• Use different forms of Energy and different forms of Investment can
provide a link between SFC and Environmental Economics
Research.
• Monetary Policy instruments can be used for climate change
mitigation.
• In the case of a stationary state both GT and GCG can have
important effects for the reduction of both the use of non renewable
energy and the GHG emissions.
• The use of GT only is negative for output.
• The use of GCG only, has limited effects on reducing GHG
emissions.
• A combination of the two policies has the best overall effects in the
case of steady state growth.
• In the case of a balanced growth path the same policies are not
efficient in reducing the GHG emissions and the use of non
renewable energy.
Giovanni Bernardo – Giorgos Galanis - New Economics Foundation