Green Swans and the knowability of Climate Futures. Towards a Post-Keynesian reading of Net Zero economic transitions.

Keywords: Economic Geography, Financial Geography, Uncertainty, Inequity, Climate
Session Type: Virtual Paper Abstract
Day: Tuesday
Session Start / End Time: 3/1/2022 11:20 AM (Eastern Time (US & Canada)) - 3/1/2022 12:40 PM (Eastern Time (US & Canada))
Room: Virtual 1

Abstract

This paper addresses attempts within central banking and macro-economic regulatory communities to prompt the financial system into increasing resilience against disruptions caused by climate change. A notable feature of this regulatory drive is the concept of ‘Green Swans’ – highly complex, impactful and uncertain events related to climate change. The central belief is that public bodies and private actors should act now to prevent future instabilities, regardless of present uncertainty. These potential disruptions are categorised as either physical or transition risks. Physical risks refer to losses caused by climate and weather events, while, transition risks are losses that financial firms may incur following policy changes.
This paper responds to Gary Dymski’s (2017) call for a “more Keynesian geography” in analyses of financial stability, by attending to “real-time and Keynesian uncertainty.” We argue that - following Keynes- some future events are not amenable to calculation and will always frustrate attempts to mitigate them. This paper explores attempts to repurpose macroprudential regimes that emerged following the Global Financial Crisis as tools for exploring financial market risks and losses associated with climate change and transitions toward carbon neutral economies.  These stress tests simulate the impact of climate-related shocks on regulatory capital held by banks, insurers and counter-parties.  The paper presents an example of both a transition risk – climate tipping points – and a physical risk – stranded liabilities or financial obligations by fossil fuel companies to decommission mines – to illustrate how real time and fundamental uncertainty frustrate scenario design.