Macroeconomics, finance, and sustainability
The economic implications of the transition to a low-carbon energy system: a stock-flow consistent model
Authors: Emanuele Campiglio, Antoine Godin, Stephen Kinsella
Abstract: A number of different policies can be implemented to accelerate the flow of investment towards low-carbon sectors, from carbon taxes to ‘green’ financial regulation. This paper presents a small demand-led macroeconomic model aimed at studying the effectiveness of such policies, together with their implications for the wider economic and monetary dynamics. The model features two types of energy-producing capital stocks: a ‘dirty’ one based on fossil fuels, and a ‘green’ one based on renewable sources. The two sectors differ in terms of productivity, capital costs and access to credit. Firms producing consumption goods choose the mix of ‘dirty’ and ‘green’ energy according to energy prices and their set of preferences. The use of stock-flow consistent modelling and simulations allows us to study the transition to green energy capacity in a systemic perspective, explicitly considering the dynamics of the balance sheets of households, firms, government, banks and the central bank.
Investing in a new regime: Confidence and uncertainty in a low-carbon transition
Authors: Eric Kemp-Benedict
Abstract: This paper examines a low-carbon transition using post-Keynesian theory, which assumes fundamental uncertainty. Building on prior work, the paper applies a green-brown capital model in which “green” capital is less productive than “brown” capital in today’s economy, but becomes relatively more productive as it displaces brown capital. The earlier work identified a tension within countries between the need to maintain employment at desired levels and the need to stimulate low-carbon investments, and a tension between countries in that domestic policy outcomes depend on the actions of trading partners. This paper goes on to consider the impacts of behavioral change, such as reduced working time and reduced consumption in high-income countries, and of potentially divergent policies in high-income and developing countries. To capture fundamental uncertainty the paper uses exploratory scenario analysis, with the Shared Socioeconomic Pathways (SSPs), one component of the new generation of global climate scenarios, as a frame.
The transformation of the social relation to energy from the Fordism to Neoliberal capitalism. An macroeconomic and comparative empirical exploration in wealthy countries (1950-2010)
Authors: Louison Cahen-Fourot
Abstract: Drawing on environmental data, this paper seeks to explore the role of the environment in the fordist-compromise as studied by the Régulation School. The environmental dimension is usually lacking in the regulationist analyses, despite some recent progress. We aim at revisiting the institutional compromise of the fordist era in assuming that the exploitation of the environment is a key aspect of the emergence of the fordist accumulation regime with its strong redistribution mechanisms. In the perspective of the emerging ecological macroeconomics, this paper seeks more broadly at enhancing our understanding of the environment as a key component of a particular accumulation regime. Insights from this analyse should help us comprehending the place of the environment in the current finance-led accumulation regime.
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Towards Post Keynesian Ecological Macroeconomics
Authors: Giuseppe Fontana, Malcolm Sawyer
Abstract: The paper proposes a post Keynesian approach to the macroeconomic analysis of sustainability. It explicitly acknowledges that economic growth is a double-edged sword. Growth can help to alleviate persistent levels of high unemployment, but it can also lead to potentially catastrophic environmental problems. Building on the Monetary Circuit theory and the Demand-led growth theory, the paper offers an analysis of the interconnections and interdependence of the economic, biophysical and social worlds and by doing it hopes to provide the building blocks for the establishment of Post Keynesian ecological macroeconomics.
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Financial and monetary reform for sustainability
Full Reserve Banking: solving the problem of public debt and the positive interest-rate-growth-differential through debt-free money?
Authors: Martin Sauber, Benedikt Weihmayr
Abstract: In the post-growth debate a rising number of authors advocate monetary reforms (100%-Money, Full Reserve Banking), whose intention it is to prevent banks from creating deposits and establish the central bank as the sole issuer of money. This paper investigates the macroeconomic consequences of issuing debt- and interest-free money. A central issue in the context of a non-growth economy is the reduction of interest-rate-growth-differential. From a monetary-Keynesian perspective, we conclude that these reforms rather lead to higher interest rates and therewith worsen the conditions of reaching a stationary economy.
Ecological constraints to Post-Keynesian endogenous money theory
Authors: Corinne Pastoret
Abstract: In Post-Keynesian theory, the money supply is endogenous, meaning that banks could indefinitely accommodate the needs of a growing economy, with no ecological constraints. Because money endogeneity has brought our economic system closer to the planetary boundaries, ecological economists advocate 100% reserve requirements for banks. However, this solution might not have the expected results in an endogenous money framework, with unnecessary high costs in terms of employment and wellbeing.
This paper starts with Keynes’s refutation of the quantity theory of money, as he proposes to think in terms of flows of money and the motives for its creation and its uses, while banks are not depicted as creators of artificial money. Then, it is argued that ecological constraints can be integrated into the Post-Keynesian theory of endogenous money and banks. In particular, banks could play a crucial role both as ecological social accountants and ecological providers of credits.
Central bank public credit creation to support Green Investment: the case of Canada, 1935-1975
Authors: Josh Ryan-Collins
Abstract: It is widely accepted that transitioning to a low carbon economy will require massive investments in strategic green sectors of the economy. Yet with very high levels of public debt, fiscal expansion does not seem politically feasible whilst there is weak evidence that capital markets can provide the necessary funds. One option that has not been widely considered for achieving this is for central banks to monetize a green fiscal expansion. A major impediment to such a policy is the perception that it would damange the ‘independence’ of central banks and lead to inflation. However, during the period between the Great Depression and the 1970s when it was common for central banks to directly support government spending and debt management via what might be termed ‘public credit creation’. This paper examines in particular the activity fo the Bank of Canada from its inception in 1935 to 1975.
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An Input-Output/ System Dynamics Approach to Regional Ecological-Economic Modeling: An Application to the Restoration of the Seine Estuary, France
Authors: Mateo Cordier, Takuro Uehara, Bertrand Hamaide, Jeffrey Weih
Abstract: It is essential to coalesce an ecological system and an economic system into a single ecological-economic system in order to elicit effective policy implications. While various modeling techniques have been developed to investigate ecological-economic systems, there is still much room for improvement with regard to their reflection of complexity. For example, while environmentally extended Input-Output (I-O) models can capture a great number of components (e.g., industries and pollutants), they are not well suited for capturing the nonlinear dynamics that are typical in ecological processes. System dynamics, a computer-aided approach based on differential equations, enables the capture of nonlinear dynamics. Therefore, we develop a hybrid model which couples a system dynamics (SD) with an I-O table to capture the complex dynamics of an ecological-economic system. The I-O part captures an economic system while the SD side captures an ecological system and the interaction between both systems.
A Green Lewis Development Model
Authors: Guilherme de Olvieira, Gilberto Tadeu Lima
Abstract: We developed an environmental extension of a Lewis’s dual economy model, in which the interaction between environment and growth, in one of its several aspects, is explicitly modeled. The economy produces a single good through a Traditional and a Modern sector. The latter generates negative environmental externalities and is taxed by the government, which in turn invest all the resulting tax collection in an Environmental Research sector responsible for the pollution abatement. The model shows that the ecological dynamics can enlarge the size of a development trap, from which a developing economy, if left to the free play of its structural forces, may never escape. This new theoretical result is called an ecological development trap. In addition, as the environment is a state variable, maturity can be reached not only through a standard Big Push, but through what we call an Environmental Big Push.
Introduction to ecological econophysics for degrowth
Authors: Salvador Pueyo
Abstract: A socially benign degrowth demands a deep reorganization of economies, but complex systems are difficult to reorganize without unintended consequences. Such systems often display emergent properties, i.e. macroscopic features that cannot be trivially deduced from microscopic dynamics. Planning for radical changes demands tools to forecast the emergent properties that will result from different policy options. In particular, we want to degrow without triggering uncontrolled recessions, while increasing equality to compensate for the decreasing average consumption, and conserving the basic functionality of the economy. Since these features can be largely expressed as statistical distributions (of recession sizes, of individual income or resource consumption), they demand the kind of approach used in statistical physics, which links statistical distributions to their underlying mechanisms. Statistical physics has been applied to economics with the label of “econophysics”. We need a synthesis between the insights of econophysics and those of ecological economics, or an “ecological econophysics”.
Macroeconomic Sustainability Scenarios for Europe
Authors: Eckehard Rosenbaum
Abstract: Rational policy making requires that the consequences of different policy options are assessed comprehensively. Given the long-term impact of many environmental policies, such an assessment must take into account that the future is inherently uncertain. This uncertainty concerns not only assumptions about important variables such as population trends or energy prices, but the political process itself. Put differently, since there are reasons to suggest that available policy options and political framework conditions are interdependent, both must be analysed and formulated together. Against this background, the paper develops three possible scenarios for the European Union. These scenarios can be distinguished by different international contexts, which arguably have an impact on the scope and extent of environmental policies in the European Union. On this basis, the scenarios then identify compatible policy options and analyse their impacts for important socioeconomic and environmental variables using a macroeconometric model of the European Union.
Stock-flow consistent models
An ecological stock-flow-fund modelling framework
Authors: Yannis Dafermos, Giorgos Galanis, Maria Nikolaidi
Abstract: This paper develops an ecological stock-flow-fund (ESFF) modelling framework that integrates the flow-fund model of Georgescu-Roegen (1971, 1979) with the stock-flow consistent modelling approach of Godley and Lavoie (2007). This framework combines various fundamental features of post-Keynesian and ecological economics, most notably the consideration of the macroeconomy as an open subsystem of the closed ecosystem, the impact of aggregate demand on economic growth and employment, the biophysical limits to economic activity, the effects of finance on growth and the importance of the laws of thermodynamics. The ESFF modelling framework relies on four matrices: 1) the ecosystem flow-fund matrix; 2) the ecosystem stock matrix; 3) the transactions flow matrix; 4) the balance sheet matrix. It is argued that the framework developed in the paper provides a quite rich platform for the analysis of the complex interactions between the macroeconomy and the ecosystem.
Macroeconomics of Growth, Distribution, and Climate Change
Authors: Armon Rezai
Abstract: Ecological Economics has not paid sufficient attention to the macroeconomic level both in terms of theory and modeling. Yet, key topics debated in the field of Ecological Economics such as sustainable consumption, reduction in working time, the degrowth debate, the energy-exergy link, and the rebound effect require a holistic and macro perspective. While this deficiency has been identified before and Keynesian economics has been generally suggested as a potent vehicle to establish economic system’s thinking, very little concrete theorizing and practical suggestions have been put forward. We give further credence to this suggestion and demonstrate the value of tackling key concerns of Ecological Economics within a Keynesian growth framework.
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A Stock-Flow Consistent Input-Output Model with Applications to Energy Price Shocks, Interest Rates, and Heat Emissions
Authors: Matthew Berg, Brian Hartley, Oliver Richters
Abstract: By synthesizing Stock-Flow Consistent models, Input-Output models, and aspects of Ecological macroeconomics, we are able to simultaneously model monetary flows through the financial system, flows of produced goods and services through the real economy, and flows of physical materials through the natural environment. A simple baseline model is used to analyze the role of energy price shocks in contributing to recessions and the rebound effects of increased energy efficiency. In the stability analysis, we demonstrate that contrary to some claims, 0% interest rates are not a necessary condition for a stationary economy in stock-flow equilibrium, and we show how the Sraffian maximum rate of profit can be generalized to multiple sectors, and how inventory oscillations can destabilize the model. Third, implied heat emissions from energy conversion and the effect of anthropogenic heat flux on climate change are considered in light of a minimal single-layer atmosphere climate model.
Decoupling, Interest Rates, and the Environmental Impact of Intermediate Production in an Ecological Stock-Flow Consistent Input-Output Model
Authors: Matthew Berg, Brian Hartley, Christian Kimmich, Oliver Richters
Abstract: A Stock-Flow Consistent Input-Output model is extended to explicitly incorporate stocks of natural resources. The model is used to demonstrate that different compositions of gross output can have different environmental impacts, even if final GDP is the same for both compositions of gross output. The model is used to analyze the issue of decoupling economic growth from environmental impacts, to determine whether or not conditions of environmental sustainability and economic growth are compatible, and the different environmental and economic impacts of using renewable vs. non-renewable energy sources. Assets other than money, including bonds and equities, are added to the model, and the conditions under which positive interest rates are compatible with a non-growing economy are considered. Additional economic features are added to the model, including an ex-ante/ex-post treatment of time and capacity utilization targeting by productive industries.
Heterodox and ecological economics: Connections and contradictions
What ‘Theory of Value’ for the Assessment of Social Projects? Economic Pricing, Social Decision-Making and Ecological Valuation
Authors: Marco Veronese Passarella, Marco Boffo, Andrew Brown
Abstract: The inquiry into the cause and the measure of the value of human products had been the fundamental question underpinning the inception of modern economic thought. However, starting from the 1870s, the focus of dominant economics switched from the analysis of social production and distribution to the study of human behaviour as a relationship between ends and scarce means that have alternative uses. This specific viewpoint is at the heart of cost-benefit analysis of social projects undertaken by the government sector. However, utilitarian principles underpinning mainstream economics lead to a systematic misevaluation of social and environmental net benefits of public projects. The aim of the paper is two-fold: first, to provide a critical analysis of theoretical foundations of standard methods of assessment of social projects; second, to verify whether alternative approaches are available, for a more effective way of assessing the impacts of social projects on economy, society and ecosystem.
Towards a heterodox theory of the environment
Authors: Elke Pirgmaier
Abstract: The great challenges of the 21st century call for effective action based on sound theory. By adopting an inter- and transdisciplinary, pluralistic and holistic approach of how social and ecological systems interact, ecological economics claims to offer a viable framework to do so. An investigation of the foundational pillars of the field reveals, however, that neoclassical allocative efficiency is accepted and promoted as one core goal, which leads to theoretical contradictions and, ultimately, hinders substantial progress. This paper makes the case for the in-existence of a heterodox economic theory of the environment at a macro level and the need for establishing one. Combined insights from ecological and heterodox economics might constitute the best chance for inspiring new theory that is consistent with the bio-physical limits of the planet.
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Structural Changes and Emissions of Greenhouse Gases: a subsystem application to Brazil between 2000 and 2009
Authors: Leopoldo Costa Junior, Fernando Soares, Alexandre Souza, Edson Toledo Neto
Abstract: The recent increase in worldwide concern over global warming has raised questions about the factors responsible for this weather phenomenon. In this context, this article analyses the impacts of structural changes in the Brazilian economy from 2000 to 2009 on the vector of greenhouse gases (GHG), properly built from the inventory of emissions and the Input-Output matrix of the Brazilian economy, from which the approach of vertically integrated sectors developed by Pasinetti (1973) is applied. The analysis concludes that Brazil advanced in environmental issues during that period, especially as regards the reduction of deforestation; that the energy and service subsystems generate more greenhouse gas emissions than their respective sectors; and that the environmental impact of energy sectors is more accentuated due to the recent change in the Brazilian energy matrix.
Pluralism and realism in the identity of ecological economics
Authors: Andrew Brown, Andrew Mearman
Abstract: Recent contributions by Clive Spash have highlighted an ongoing tension within ecological economics concerning the relative merits of a strategy of pluralism, given what he argues to be fundamental deficiencies of mainstream economics. Spash advocates a ‘structured pluralism’ based upon ‘critical realist’ ontology. He claims this approach is able to accommodate a plurality of perspectives in heterodox economics, and integrate them with ecosystem concepts, whilst eschewing the unrealistic precepts of mainstream economics. We agree that critical realism has some potential benefits for ecological economics. However, drawing on recent debates within heterodox economics, we argue that critical realism also has significant weaknesses. Specifically, critical realism has a weak concept of system; has limited potential for integrating knowledge; and offers little by way of positive vision for methodology. Instead we suggest that an approach based upon ‘systematic abstraction’ is better able to achieve the integrated, realistic and pluralistic framework desired by Spash.