Financing the Transition to a Low-Carbon Economy

Report and Response

The New School for Social Research, in conjunction with Fordham University School of Law, held a lecture and panel discussion on September 20 entitled “The Transition to a Low-Carbon Economy and How to Finance It.” Organized by Willi Semmler, Briget Fisher, and Julia Puaschunder on behalf of the Schwartz Center for Economic Policy Analysis (SCEPA),this event was the latest in an ongoing conversation between NSSR, its students, and concerned policymakers and academics.[1]

Once per semester, SCEPA sponsors an event relating to climate change policy and invites some of the most notable names in climate modeling and/or policymaking to give their perspectives on recent developments in climate change scholarship. This most recent event featured Dr. Nebojsa Nakicenovic and Dr. Paolo Galizzi. Dr. Nakicenovic, an eminent scholar of energy economics, is Deputy Director General of the International Institute for Applied Systems Analysis, and Dr. Galizzi is a professor of law at Fordham in addition to being director of the Sustainable Development Legal Initiative.

The timing of the event could not have been more appropriate – Hurricanes Harvey, Irma, and Maria have recently wreaked destruction across the Caribbean. A pair of deadly earthquakes hit Mexico within a two-week period. The impending climate change catastrophe is a beast with many heads, directly influencing the occurrence of certain natural hazards (i.e., storms are expected to become more frequent and more severe), and straining the resources of vulnerable populations.

Dr. Nakicenovic responded to these crises in a 45-minute presentation on the complex systems engaged in the give and take of climate change. His lecture touched upon everything from variables well-understood and quantified (population, economic growth, technological development) to much harder to model characteristics (values and needs, power structures).[2] Perhaps most striking was his depiction of a remarkable graph of hundreds of projections of future carbon emissions – something he referred to as the “Spaghetti Graph” due to the large number of trend lines wriggling in every direction. He used this Spaghetti Graph to show how collective policy goals – such as the goals outlined in the Paris Agreement – can collapse much of the uncertainty around future carbon accumulation. When a goal is explicitly set, he argued, much of the uncertainty disappears and a narrower set of projections emerges. As a species, Dr. Nakicenovic reported, we know what needs to be done to achieve the goals we have set ourselves: net-zero emissions by mid-century. But Paris gave us not only a target, it also showed that the overwhelming majority of world leaders were willing to commit to hitting this target. Still, there is much regulatory uncertainty that must be worked out before nations take the leap.

The path forward is tricky, argued Dr. Nakicenovic, for two reasons: because the worst of the damage from climate change will not be seen for decades, and because this damage will most pointedly affect people in economies much poorer than our own. Even more, the transition to a low carbon economy does not exist in a perfect world. Instead it must occur alongside rapid urbanization – in a world where between 1.5 and 3 billion people have little in the way of basic necessities while between 1 and 2 billion have too much. Dr. Nakicenovic is concerned that we are moving toward what he referred to as a “fortress world,” with the relatively well-off shutting out the particularly vulnerable masses.

Dr. Nakicenovic concluded his lectures with a short video displaying the global rise in temperature under two scenarios: a global warming of 2 degrees, and a warming of 5-6 degrees. The differences between the two scenarios, he pointed out, do not become apparent until around 2040, meaning that the next couple of decades will look more or less similar regardless of the climate change policies we adapt today. This seeming lack of effect can lead to a sort of inertia in enacting policies which will care for the global climate system. However, it is only by taking action today that we can prevent many of the most catastrophic outcomes that are projected to occur the latter half of the 21st century if more extreme warming occurs.

Following Dr. Nakicenovic’s presentation, Fordham Law Professor Dr. Paolo Galizzi gave some insights into the past, present, and future of international agreements regarding climate change. His talk highlighted three key points regarding the trajectory of international climate policy. First, he noted that there is reason to hope that the international community is finally acting with a sense of urgency in developing strategies to address climate change. The decades between the Framework Convention on Climate Change and the Paris Agreement were fraught with toothless agreements and much back-and-forth; however, once the Paris Agreement was reached, it took less than a year for a majority of countries to ratify it and bring it into existence. Second, one of the most important things about the Paris Agreement is that it exists at all. In a divisive and contentious political climate, getting the international community to agree on something as serious as climate change is a significant victory. Third, Dr. Galizzi noted that climate discussions are made possible by the international legal framework. While not without problems, this international legal framework charts the path that economies may take on the road to sustainability.

Dr. Galizzi argued that the Paris Agreement is truly momentous in another way as well: it represents a break from the “top-down” policy dictates of prior climate agreements (including the Kyoto Accords). With international targets collectively agreed upon, this “bottom-up” approach is significant in that it leaves specific methods, and the policies for accomplishing these, up to individual participating members. Having discussed international law for most of his lecture, Professor Galizzi closed by addressing a question closer to home: whether to despair over signals that President Trump will pull the United States out of the Paris Agreement. From his perspective, the leadership of the United States would be incredibly helpful in combating global climate change, but it is not necessary. As momentum picks up on global reaction to climate change, the leadership of the United States will have less capacity to slow or halt this progress. Regardless of the decisions of the federal government, Dr. Galizzi noted that the international community would continue to push forward – just as it did when George W. Bush balked on the Kyoto Agreement. And further, despite the lack of leadership from the White House, we can take comfort in the fact that state and local governments across the country are pushing forward with their own policies and programs aimed at mitigating and responding to climate change. Some of these actors, most notably California and New York, represent some of the largest economies in the world.

While Dr. Nakicenovic and Dr. Galizzi did an admirable job covering the scientific and legal aspects of climate change, it must be admitted that the economic aspect was underrepresented. There was little talk of how to finance the transition to a more sustainable economy. This is a notable omission given that there has been a startling lack of urgency when it comes to actually putting money (or at least the large amounts of money necessary) into sustainable infrastructure. Part of this reluctance may stem from the view that it asks a sacrifice of the current generation, whereas the benefits (a cleaner, more stable environment) are not fully realized for generations.

This is a topic that I, alongside Professor Semmler, Julia Puaschander, and several other New School economists, have been researching over the past few years. Recently we have published a paper entitled “Financing climate policies through climate bonds: A three stage model and empirics” in which we consider the use of green bonds to finance projects in the near term that have benefits decades down the line.[3]

An interesting element of the green bond instrument is that it allows the burden of climate change policy to be shared across generations. In our paper, we look at the possibility of financing the transition to a more sustainable economy largely through the issuance of government climate bonds; these bonds generate money for immediate investment and may be repaid by the taxpayers of the future. In this way, the bill is not footed entirely by the current generation – which is a tough sell politically. We find that the bond market is extensive, and that there is definitely room for the green bond movement to develop and to find interested investors.

As helpful as we find them to be, though, green bonds alone are likely not enough. In “Financing climate policies through carbon tax and climate bonds,” Dr. Semmler and I collaborated with a number of colleagues to consider the implementation of a green bond market alongside either carbon taxes or emissions trading schemes.[4] In this particular case, we find that green bonds work better as a complement to carbon taxes than to emissions trading schemes because carbon taxes provide a more stable price level (a stable, predictable price level generally being good for investment). The carbon tax, additionally, generates government revenues, which might be used to offset increased energy costs for vulnerable households, fund further green investment, or supplement general government budgets.

As is often the case, when it comes to debating carbon taxes vs. emissions trading schemes, we ought not let the perfect be the enemy of the good. Taxes can be a hard sell politically, and if that is ultimately an unsurmountable issue then emission trading schemes might be effective. Like the Paris Agreement itself, and the development of the international legal framework, it will be a major victory just to have some widespread finance mechanisms in place to allow for large-scale climate investment. These mechanisms can be refined and perfected over time, but their development and widespread implementation will signal a further step in the international community’s commitment to addressing climate change.

Michael Flaherty is a PhD student in Economics at the New School for Social Research. His current research focuses on the economics of climate change. He has taught a number of related courses throughout the New School’s colleges, including Designing the Green Economy at Lang and Environmental Economics at the New School for Public Engagement. His current course, Climate Change and Cities at Milano, focuses on the role cities play both as contributors to climate change and as objects of climate change impacts.


[1] Willi Semmler is the Arnhold Professor of International Cooperation and Development, and Professor of Economics at the New School for Social Research. He leads SCEPA’s research on the Economics of Climate Change. Bridget Fisher is the Associate Director of SCEPA, specializing in communication efforts, and Julia Puaschunder is a Research Associate focusing on topics of climate justice.

[2] The presentation slideshow can be found online here.

[3] Flaherty, Michael, Arkady Gevorkyan, Siavash Radpour, and Willi Semmler. “Financing climate policies through climate bonds – A three stage model and empirics.” Research in International Business and Finance, vol. 42, December 2017, pp. 468–479.

[4] Gevorkyan, Arkady, Michael Flaherty, Dirk Heine, Mariana Mazzucato, Siavash Radpour, and Willi Semmler. “Financing climate policies through carbon tax and climate bonds – A model and empirics.” Forthcoming IMF Working Paper, 2017.

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