A couple of weeks ago, Dr Chandni Dwarkasing, Dr Yannis Dafermos and I presented at the 25th Forum for Macroeconomics and Macroeconomic Policies (FMM). The conference focused on how heterodox economists can contribute to the debate on climate change. How can we address social inequalities while preventing environmental exploitation? How would a Green New Deal work in practice? Should we keep on talking about economic growth at all?
Climate change and the European Central Bank
Along with his co-authors, Yannis analysed the existing European Central Bank (ECB) rules for the provision of liquidity to euro area banks ̶ the so-called Eurosystem collateral framework. By focusing on the corporate bonds that euro area banks can use as collateral for getting access to central bank liquidity, they showed that the ECB favours fossil fuel and other carbon-intensive companies disproportionately to their contribution to EU employment and the production of goods and services (see the figure below). This undermines the transition to a climate-neutral European economy.
They proposed three different alternative options for greening the Eurosystem collateral framework. According to these options, “dirty” bonds are penalised and replaced with green bonds or bonds issued by firms that engage in green activities. By implementing these options, the ECB can incentivise banks and the broader financial system to adopt practices that are in line with the climate emergency.
EU policies effects on the Global South
In turn, Löscher and Dwarkasing opened up a discussion on the impact of EU climate policies on the Global South. Policies like the Farm-To-Fork Strategy (F2F) can severely impact commodity exporters, such as Brazil. For instance, in the case of soybeans, while the EU has increased its production, it is still heavily dependent on imports. Therefore, to guarantee sustainable practices as claimed by the F2F, demand for Brazilian soybeans would need to decline as about a fifth of EU’s consumption come from deforestation areas.
Moreover, a reduction in the demand for fossil fuels, as the result of revisions to the EU Energy Taxation Directive, will likely affect countries dependent on exporting oil or gas, such as Nigeria and Russia. Therefore, policies that will involve those changes need to be well-designed to prevent balance-of-payment crises in those countries. Concrete impacts of EU climate policies, however, are still difficult to estimate given the various ambiguities and open questions regarding policy targets and how they will be met in the face of bi- and multilateral trade agreements.
Financial Inclusion and Inequality
Finally, my presentation was on the effects of financial inclusion (FI) on poverty and income inequality. We previously discussed how high-interest rates are a barrier to poverty reduction through FI. Now, our econometric results also show that the policy has no effect on reducing income inequality. In fact, some of the results suggest that FI can increase inequality in developing countries, as the high-interest rates are paid to the pockets of bankers and investors. In turn, social protection policies such as cash transfer to the poor, paid sick leave, or unemployment benefits reduce inequality in developing and developed countries. Thus, a sustainable policy to reduce inequality, especially for fossil fuel or less-than-green commodities, such as soybeans, might be challenging for developing countries.