Green macrofinancial regimes

Abstract

Debates about climate policy have neglected the question of macrofinancial pathways to decarbonisation, not all of which are economically and politically 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. Focusing on two dimensions—the scale of green public spending and the degree of discipline imposed on private capital—we derive a typology of four regimes. Derisking regimes are low-discipline: under weak derisking, a fiscally constrained state tweaks the risk-return profile on infrastructure assets 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. Derisking regimes are rendered unstable by coordination problems and regressive distributional consequences. This may tip societies into a carbon shock therapy regime under which discipline is enforced by carbon prices and market competition, resulting in a disorderly transition path. 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.