Green macrofinancial regimes

Examines alternative macrofinancial paths to decarbonization.

Benjamin Braun

Daniela Gabor


Debates about climate policy have neglected the question of macrofinancial pathways to decarbonisation, not all of which are politically and environmentally viable. We propose a theory of macrofinancial regimes, understood as combinations of monetary, fiscal, and financial institutions that shape the creation and allocation of credit/money, and hence the speed and nature of the green transition. We derive a typology of four regimes, across two dimensions—the scale of green public spending and the degree of discipline imposed on private capital. Derisking regimes are low-discipline: under weak derisking, a fiscally constrained state tweaks the risk-return profile on infrastructure assets in order to reduce the carbon footprint of the economy’s existing sectoral structure; under robust derisking, the state subsidizes capital expenditure in cleantech manufacturing directly, and with the ambition to alter the economy’s sectoral composition. Although derisking is hegemonic today, coordination problems and regressive distributional consequences render these regimes unstable. This may tip societies into a carbon shock therapy regime under which the transition is coordinated via prices alone, and where discipline is enforced by market competition. Alternatively, institutional reforms that increase the state’s capacity to spend and to discipline capital may give rise to a big green state regime where coordination is achieved through state-led planning.

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