• Energy Research

There is increasing concern among financial regulators that changes in the distribution and frequency of extreme weather events induced by climate change could pose a threat to global financial stability. We assess this risk, for the case of floods, by developing a simple model of the propagation of climate-induced shocks through financial networks. We show that the magnitude of global risks is determined by the interplay between the exposure of countries to climate-related natural hazards and their financial leverage. Climate change induces a shift in the distribution of impacts towards high-income countries and thus larger amplification of impacts as the financial sectors of high-income countries are more leveraged. Conversely, high-income countries are more exposed to financial shocks. In high-end climate scenarios, this could lead to the emergence of systemic risk as total impacts become commensurate with the capital of the banking sectors of countries that are hubs of the global financial network. Adaptation policy, or the lack thereof, appears to be one of the key risk drivers as it determines the future exposure of high-income countries. This implies in particular that the avoided costs in terms of financial stability should be weighted in as benefits of adaptation policy.

National audience

This paper explores to what extent moving towards the 30% GHG emission reductions by 2020 with respect to 1990 in the EU can be considered a transformative target. To do so, we first define the concept of transformative targets from a complex systems perspective and show a novel approach and original results using an extended application of the GEM-E3 model. Traditional macroeconomic models cannot easily handle key synergetic system effects derived from green growth and sustainability policies, and thus require additional features. We analyse the role of semi-endogenous growth driven by learning-by-doing and low-carbon investment expectations following a long-term transformative trajectory.

There exists a wide gap between the predictions of strategic models of network formation and empirical observations of the characteristics of socio-economic networks. Empirical observations underline a complex structure characterized by fat-tailed degree distribution, short average distance, large clustering coefficient and positive assortativity. Game theoretic models offer a detailed representation of individuals’ incentives but they predict the emergence of much simpler structures than these observed empirically. Random network formation processes, such as preferential attachment, provide a much better fit to empirical observations but generally lack micro-foundations. In order to bridge this gap, we propose to model network formation as extensive games and investigate under which conditions equilibria of these games are observationally equivalent with random network formation process. In particular, we introduce a class of games in which players compete with their predecessors and their successors for the utility induced by the links they form with other nodes in the network. Such sequential competition games can represent a number of strategic economic interactions such as oligopolistic competition in supply networks or diffusion of influence in opinion networks. We show that the focal equilibrium that emerges in this setting is one where players use probability distributions with full support and target the whole network with probabilities inversely proportional, to the utility of each node. Notably, when the utility of a node is inversely proportional to its degree, equilibrium play induces a preferential attachment process.

Green bonds are seen as a key instrument to unlock climate finance. While their volume has grown steadily in recent years, the impact of the ‘green’ label on the bond market is poorly understood. Here, we investigate the differences between the yield term structures of green and conventional bonds in the US municipal bond market. We show that, although returns on conventional bonds are on average higher than for green bonds, the differences can largely be explained by the fundamental properties of the bonds. Historically, green bonds have been penalized on the municipal market, being traded at lower prices and higher yields than expected by their credit profiles. In recent years, however, the credit quality of municipal green bonds has increased and the premium turned positive. Green bonds are thus becoming an increasingly attractive investment, with scope to bridge the climate finance gap for mitigation and adaptation.