 Welcome back to the ECB Forum on Central Banking. We really would like to hear your feedback. So do continue to share your comments on social media under the hashtag ECB Forum. And of course, for the participants, don't hesitate please to raise your virtual hand and let us know in advance when you want to submit a question to the participants, to the chair and the preprecenters and discussant. At this point, let's immediately jump into our next session chaired by the vice president again. So the floor is yours, vice president. Thank you very much, Teri. We have, you know, we are going to start, you know, the second session. And the second paper is going to be focused on another consequential structural change in the world economy. That is the issue of climate change. Professor Rick Van Der Ploeg from Oxford University will present the paper Microfinancial Implications of Climate Change and the Carbon Transition. Among other elements, it will set light on the best suited policy frameworks to guide the transition to a low carbon economy. So, Professor, you have the floor for 20 minutes. The structure will be identical to the one of the of the previous session. Thank you for this introduction and for the invitation. I will talk about the microfinancial implications of climate change and the carbon transition. So it's probably best to first go to the very famous graph. It's been many of them have been shown before, shown before. So what you see on the horizontal axis is the total cumulative emissions or CO2 since 1870. That's the beginning of the industrial revolution. And along the vertical axis, you see the temperature increase since the beginning of the industrial revolution. And what you're supposed to see really is a basically an upward sloping line. It's, you know, it's about two degrees per trillion tons of carbon is what you see. And what you see, it's up to 2010. That's the historical data. And from then on, you see all these projections by all these large scale science models and you see also a wafer of uncertainty. And basically what you see is therefore that anthropogenic manmade carbon emissions are really the prime driver of temperature. And that's what's causing us out. That's why our challenge is to keep get the emissions down, get rid of emissions altogether. We can and then we can actually make sure that we that we that we stick. We can keep temperature to two degrees or perhaps even one half degrees. So the best way of doing that is I will argue in arguing this this paper is to price carbon. Pricing carbon can be done via permit market like we do via the ETS in Europe. But it can also be done via carbon taxes or indeed a combination of it. The advantage of pricing carbon are many fold. It cuts demand for fossil fuel. You leave more of the stuff in the ground. That's most important of all, you leave to call the oil and reserves in the ground. You don't burn it. You substitute from the tar sense, which is very carbon intensive coal and crude oil to less carbon intensive fossil fuel like gas. You encourage renewables and you you you introduce markets for carbon capture and sequestration and you also curb slashing and burning of forest. So also on the whole, you also get some collateral benefits and that's often forgotten by pricing carbon and and and and you know, reducing emissions, you lower air pollution and therefore you get better health. The advantage of these collateral benefits that they're local rather than than global. So it's very important to look at those as well. So there are many reasons why we need to price carbon one way or the other. And it's important for the narrative to to to mention all of these. So but there are many problems you can ask if it's so easy. Why are we doing it so little? So the first no brainer is before we even start pricing come, we should realize that the world is full of fossil fuel subsidies. IMF estimated about six and a half percent of world GDP. There is an enormous amount of coal. But really, we should have a moratorium on coal. So these are the no brainers. But if you can't even do that, how can we even start to price carbon? So that's the first point to make. Second point to make is that you're asking current generations to make make sacrifices to to cut global warming for the benefit of future, possibly richer generations. So then we need to make schemes where you maybe run up the government debt or give some transfers to the current generations to get an intergenerational win-win situation. Kotli Koff and Kaufers have illustrated that very well. You also need a common carbon price throughout the globe. So in every country of the world, it's efficient if it's the same. That's why we that's why economists advocate trading in permits. But to do that to to to encourage poor countries to join in, you need to get in transfers, but it doesn't really happen. Another problem with carbon pricing is why it's difficult in practice. It hurts to poor. So you it's often a regressive carbon prices are regressive. So you need to use part of the revenue to compensate lower income groups to avoid problems like yellow vests. So that's obviously is often not done. So often people say less price carbon, but then they forget about the compensation for those who suffer most. Then another issue is well known. It's the biggest international free riding problem on the planet. So you will get if you price carbon unilaterally, then that's basically a present to your neighbors because it will depress world's prices of oil and things like that. So that means that your neighbors will will increase their emissions. So that's what's called carbon leakage. So the best way to do it is to get a level playing field. And you do that by having border tax adjustments. But that's still difficult. It hasn't really been done properly, but that's what needs to be done. Alternatively, if you can't do the border tax adjustments, you might want to do production subsidies for steel, cement and other industries that are most at risk of foreign carbon intensive competition. So you want to price them, but you may want to all set them by giving them some production subsidies. So that's the best way of doing it. Alternatives, ways to avoid international free riding problems are climate tariff clubs or caution policies like buying up forests to preserve those carbon sinks. Another challenge with carbon pricing, why it's not so good as it is in theory, is the green paradox. Politicians, and I speak as a former politician myself, have a tendency to postpone and to use the carrot instead of the stick. They like subsidies instead of taxes. So if that's the case, there's a huge literature, both empirical and theoretical, that showed that oil sharks will pump up oil faster to avoid capital losses, which accelerates global warming, of course. So what you see is that to avoid the higher carbon price in the future, they're going to pump it up faster and that accelerates global warming. And then, of course, there are many problems with policy failure and capture if you don't use pricing carbon. So particularly, the governments tend to pick winners rather than they think they're picking winners, but they often end up picking losers. So the governments don't like carbon taxing. They prefer to give subsidies. So these are many reasons why, although we know that carbon pricing is the best, often it's not done in practice. It's interesting that I'd like to say this here as a citizen and not as a central bank or a politician, that it pleases me to say that central banks feel a much bigger urgency to do something about the climate and see it as part of their fiduciary duties than maybe governments. Governments are taking much less action and it would be nice if governments and monetary authorities could go up together in this task. So there have been two approaches to carbon pricing or climate policy. I mean, the bottom line is you want to credibly commit to a rising path of carbon prices. It's very important to do that for to avoid holder problems and that firms investing know this is going to be the green economy. Of course, we don't have it. We have Obama, followed by Trump, and now we've got Biden. So there's a lot of volatility. There are two approaches, the Piguvian approach, where you set carbon price to the sum of all the marginal damages. Yeah, it's called social costs of carbon, the present value of all damages from emitting one ton of carbon today. And then you adjusted for all kinds of tail risks, particularly, so tipping points, because a lot of risks about the climate system and there's a lot of risk about the economic system. All of these tend to boost this this Piguvian price of carbon. But there's a more pragmatic approach used by central bankers and by the IPCC. It's just to put a cap on temperature, say two degrees or one and a half degrees. The big advantage of that is that at access to focal point, it is a bit ad hoc, but it acts as a focal point. It leads to a cap on cumulative emissions of and therefore it actually makes it very easy for policy to talk about it. So although economists have been talking about the Piguvian approach, most of the policy makers have been talking about this temperature cap approach. So let's first look at this Piguvian approach. So this is perhaps the best study by Burke et al. in nature. And if you look at the right panel, you see the percentage losses in GDP as temperature increases from one to five degrees. So if you look at the blue line, that's the one coming from the Berkshire. These are much, much high. It can go up to 40, 50 percent more are the losses if you go to five degrees Celsius, which will happen if you don't do anything. There's the existing integrated assessment models, like the main one by DICE, for which North has got his Nobel Prize, predicts much lower losses. So we see there's a huge disagreement. I tend to think that the blue line is probably the more realistic one. What we also see the left panel is that the poorest countries are typically the ones that have the biggest losses from temperature rises. There's the rich countries, they may actually even benefit sometimes. So this is this is under a scenario where temperature goes up to about five degrees. So here we see this diagram. If you go here from two degrees and you go until you hit the line, then you can read off how much emissions you're allowed to have. And that gives you your carbon budget. So so what's been shown is that that with these very high damages from Berkertol, so 12.5 percent of all GDP per degree Celsius. And if the slope of that line, the second line is one degree Celsius between tons of carbon, you come over the Pigouvian carbon price very, very high of two hundred forty five dollars per ton of CO2 is much higher than many governments are contemplating. Interestingly, if you allow for uncertainties, that will be even higher. In contrast, the North House thing has much more modest damages and they only come up at about 18, 18 dollars per ton of CO2. So the point is that there's a big range in these prices, which we should take account of. So that's probably the reason that big range by central banks and policymakers have adopted a temperature cap of two degrees. That temperature cap means that we can only burn about 150 to 300 gigatons of carbon from 2015 onwards. It means that global at global use of 10 gigatons of carbon we deplete the carbon budget in about 15 to 30 years. If the temperature cap is lower or you have a tighter risk tolerance, it will be much faster to be in the next two or three years. So so the big lesson from this story is that the temperature cap approach we must keep fossil fuel reserves in the ground and not burn it. So so all of Antarctica, all of the tar sands in Canada, for example, to achieve this, we need a carbon price that grows much faster than the rate of economic growth, which is to be the case from the bigger approach, it has to grow the rate of interest. So this is why if the purple line is a North House story and the dotted line is the IPCC story, you have to you ramp up the carbon price much quicker. Therefore, you stop much earlier and therefore it's higher as well because the North House damages are not are not high enough to ensure you to stay below two degrees Celsius. So that's another reason why people chose the IPCC approach. So that's what you that's typically the type of carbon price path that needs to be followed. The problem is that most studies we see they use rates of growth of the carbon price, which are ridiculously high. So so sometimes five or 12 percent of the UK even has 15 percent per year. So that's a kind of a gigantic procrastination of carbon pricing. It's highly inefficient. I can see why it's happening politically, because you don't have to do much today and all of it is done in the future. So it's also open to problems of green paradox. Christian Gollier did a kind of asset pricing approach and he speaks of the big green bet. And he finds that you should use the growth of carbon price should not be to the safe interest rate plus beta times the risk premium. And he finds if you do all the exercise, it comes about three and a half percent per year in real terms. So really, so a good advice to countries is to start with a high government price and then let it grow in real terms with three and a half percent per year from that onwards and then announce that and stick to it. Because so that the economy and the businesses know that the world is changing from a carbon intensive world to a carbon free world. This is this famous study in nature by McLeod and Eacons, where they show that you need to keep to get the two degrees target. You need you need to keep a third of all oil in the ground. Half of all gas and and and 80 percent of all coal should be unburned. Now, the problem is that most of the old companies have reserves and and and likely reserves called resources here may be free to ten or ten eleven times as big as as as what is necessary. So so either those companies are overvalued or or the climate policy is not really credible yet. So this is quite an astonishing figure to think about. So they need to really, as I said, that if you allow for these tail risks in either approach, that is, the big moving approach or the IPCC approach, there's a lot of tail risk because of tipping points. So think of the tipping points due to the melting of the permafrost, reversal of the Gulf Stream, melting of the gigantic ice sheets like Antarctic ice sheet or Greenland. Though those uncertainties will lead for precaution reasons to an enormous, more ambitious climate policy than we would have done otherwise. Now, there are people who argue and I disagree with that a bit. There's a famous paper by Daniel Adoll and the Proceedings National Academy of Sciences, who argued that as over time, also using an asset price approach, damage and certainty is greatly resolved. There's a there's a preference for the resolution of uncertainty, optimal carbon price as a tendency to fall. And that's less clear if you if you allow for if you allow for the fact that tipping points are recurring like these nine tipping points I just mentioned, then that thing won't happen and the carbon price will be rising again, as we've shown in this paper by Cain Lenton. So I think it's important for central banks, but also for economists to think more about the financial aspects of climate policy because at the moment, what's going to happen is that these carbon and sense of sectors or brown sectors will either have to adjust or they will have to run down the carbon and sense of capital stocks. And these slides in the paper goes a bit at length to talk about that is a diversification perspective and there's a climate perspective from a climate perspective on the run down the dirty capital stock completely. But you may not you may not want to do that if you need to have some of that dirty capital for justification reasons. So what what can be shown is that these diversification considerations can prevent driving carbon and sense of capital stock to zero if climate damages or models. So it kind of frustrates climate policy a little bit. So we need to look at those aspects, whether that's important or whether it's just a few radical curiosity. You see that in this graph that the share of dirty capital comes down by more in the absence of climate policies, a dotted line in the if you have climate policy damages, you bring down the share of the capital by more, but not to zero. But if you increase damages more and more and more, you will bring it down to zero. And so we need to look at more of those type of capital asset pricing models. I want to make a few points about disruptions, particularly the risk of stranded assets. So this policy uncertainty, policy tipping and irreversible investments can lead to to sudden revelations of financial assets and the risk of stranded assets. I did you have to scrap the investments in, for example, coal-fired power stations. So it's important to distinguish those transition risks from physical risks. So the empirical evidence, and I think it's important to say something about that suggests, particularly these two papers that investors are already demanding higher stock market returns after controlling for the farmer French factors like size and book to market, et cetera. But because they want to be compensated for the risk that those that those that those the carbon risk that those firms face because when the green transition really takes place, an actual fact that people can actually show that as the markets have started to price in the climate transition, as people have become more aware of climate change risks, you will find that there is actually that that that investors demand a higher risk premium on those carbon intensive assets. So really, maybe in a certain sense, the markets are seeing already more of this than maybe governments are. So you see, of course, an increase in investors with preferences for green investing and environmental impact investing. So in the discussion, it would be nice to talk about a readily papers are starting to appear on Taylor rules should they respond to global warming? Yes or not? Maybe depends on divine coincidence. Maybe if you the negative effects of carbon pricing and output are curbed, if you recycle some of the revenue via a low labor income tax. And that's particularly true if there's a lot of wage and price sluggishness. People have argued for pro cyclical carbon taxes. People have argued for pro cyclical for macropredential wage, which differ for green investments in carbon taxes and for easing reserve ratios for low carbon lending if you're using central bank collateral to cut emissions. So I finish with my last slide to two. So the first one is that there is that we need to look at networks follow the work of the network for greening financial systems. There's a lot of work on financial contagion and that particularly that for larger negative shocks, propagation of shocks can lead to fragile financial system. So we need to look at the resilience of financial systems. And that really depends on the structure of networks, star like nature of the networks and network structure really matters. And it may be that climate monetary policy like monetary policy may make network denser, so a stronger climate policy may have larger effects than small climate policies. So in the end, I think then therefore we need to be aware that riding a carbon bubble may be irrational for maybe rational for as long as these self-reinforcing languages and liquidity is forthcoming. But when the musical chairs stop, when the music stops, then they may be stuck. Financial regulators are aware of these risks. So that's therefore important case for climate stress testing and to avoid market panics and systemic risks. So to come up with a conclusion, I would argue for a determined and safe carbon budget commit to a steadily growing carbon price at, say, three and a half percent per year. Take account of all the climatic and economic risks. Carbon price should start high enough to avoid green paradox effects. The paper also argues for an independent emissions authority or a carbon central bank if you ensure cumulative emissions stay below a cap. So you want to give a clear mandates to such an emissions authority to curb the influence of lobbies and political influence. Just like we've handed the monetary mandate over to the central banks. Maybe we should think a bit about that. It's a bit more radical, but it will be useful to think about it. It's important to use the revenue to compensate low incomes and firms that are most at risk of leakage. If carbon border tax adjustments are infeasible, use debt or transfers to the current generations to ensure an intergenerational win-win. And you need complementary macro policies. Think of a green, green quantitative easing, more stringent prudential policies for carbon intensive companies need public funds to finance a low carbon transition. Investors are already demanding higher returns from dirty companies to be compensated for the transition risk. And carbon intensive firms already need to pay higher interests on their loans because they're risky. So the crucial thing that I want to finish with that is to avoid disorderly green transition by climate stress testing to realize that these transition risks can be amplified in networks through defaults and contagion, especially when balance sheets are not very well diversified. So continue rolling out initiatives and the benchmarking taken by the NGFS and others. Thank you very much. Thank you very much, Rick, for this very rich comprehensive and insightful presentation. Now the paper is going to be discussed by Cygne Krosstrup, member of the Board of Governors of the Danish Central Bank. Cygne, the floor is yours. Thank you so much. And thank you for having me discuss this very interesting paper. And I would say greetings from Copenhagen, first of all. So this is a very interesting paper on the macroeconomic macro financial implications of climate change and the carbon transition by Frederik van der Ploek. And I very much enjoyed reading this paper. It covers vast ground and it is particularly focused on the insights that we have from the asset pricing and the finance literature for climate change. And I think that that is a contribution in itself. It's relevant and timely. And I actually had prepared to tell you why, but I think that Professor van der Ploek made a very good case of this so I can skip that part and just say that we are heading into a large scale transition of our economies. And we will need policy to guide that process. And I think that in this sense, I think this paper is going to be a very valuable guide and will also inform that process. Well, now I read this paper with a particular interest in what the literature tells us or what the literature teaches us about the implications of climate change and the transition for central banks. And I know I'm not alone in this interest. Just the fact that we're discussing climate and the climate literature here in central virtually is a very much an illustration of this interest. But I also have here a slide. Let me see if I can change slide. Yes, there I have your slide that that shows you Financial Times articles and tweaks since 2010 with the phrases climate change and central bank in them. And you can clearly see that this index it took off from 2018. It has plunged a bit and I would say that that is the so-called March of events COVID-19 that took a lot of attention. But I do expect that this trend will continue to increase. And there are very good reasons for this interest. It's clear from this review that climate change on the transition will affect economic outcomes and financial markets, but are core to the mandates of many central banks. There are there's a lot of insight in this very vast literature that has been summarized in this paper and I cannot possibly do justice to all of that in my discussion, but I focused on a few points that I find to be particular salience. And let me switch to the first comment I have. It's actually more of an observation. It is that how clearly when you look at the literature and optimal carbon pricing and combine that with finance literature and the risk and the literature on stranded assets, how clearly that illustrates the importance of taking into account the transition when you're evaluating financial stability. And I just want to make that point here graphically. So this is a mock chart of an optimal carbon price. This is the IPCC approach that Thunder spoke about, the optimal carbon price in purple, which starts out relatively high and then it has a very smooth increasing rate, which is equal to the interest rate and I might get back to that. If the carbon price does not start out high enough, if there is a delay in policy, then we'll start out lower and then we're on the blue line and then we'll have to have a much steeper increase at a later date in carbon pricing. And if on top of that, we're not expecting, on top of that, if markets are not expecting or not sure that this carbon price will actually increase, then this will not be priced in assets smoothly. And then we're at a risk of having so-called policy tipping points at a later stage where the risk and severity of stranded assets are much increased. And this just points out how important it is to take into account these transition risks when you're evaluating financial stability. And I want to say that these types of scenarios are already being looked at by many central banks, including our own, last week we came out with a climate stress test of our banking sector to exactly these types of both moderate and the delayed policy scenarios, which brings me to the second point. This is on the literature review on the empirical evidence on whether risks associated with climate change are priced in the market or whether the markets are underpricing climate risks. This is a really important question for many reasons. And I think that it's a very, very much a value I'd love to pay to go through this literature, but it does, this is my question is, what can we really conclude from that literature on whether we are seeing underpricing of climate risks? And I would very much welcome more discussion of that. And let me just explain. So the question is really important because if markets are not pricing climate risks appropriately, it means that they're not performing, markets cannot perform their role in allocating finance to where it's most needed. So away from carbon intensive investments toward investments that are supporting the transition. It also means that we might end up having risks placed in balance sheets that do not have the absorptive capacity for those risks. And then we again, we have a financial stability problem. And there are very good reasons why we would expect that we would suspect that markets are not adequately or correctly pricing climate risks. And they would be nice to actually talk about those, but I would say that just they are mostly related to information challenge. We don't have enough information to make these pricing. This lack of information and transparency in the markets on the climate risk and exposures is also a reason why it's very hard to come up with a design of empirical studies that would actually allow us to identify these types of risks. What this literature does is it takes asset prices and it looks at whether there's an association between different types of asset prices and related risk metrics for climate change or it looks at the asset price responses to news about for instance, a transition policy. And I have an example of that in the slide here. This is from a study from the ECB and ESRB that came out, very interesting study that came out last summer which looks at associates the emission scores of EU banks and insurers with price to book ratios to look to see if there is actually if climate risk might be associated or reflected in these prices. And I will not talk more about that. That's just an example. There's quite a big literature looking at these types of studies. But my question is that I think that we can conclude that yes, in many cases, asset prices are sensitive to different types of climate risks, but not all. There is also some evidence that this sensitivity has been increasing in recent years, which is a good sign. But going from there to concluding about systematic underpricing of climate risks, that is the discussion that I'm missing and I would very much like to hear your point of view on that. And that brings me to my final point. And this literature already covers a lot of ground. And this final point is asking you to cover just a little bit more. That is there's a lot of this literature. There's in the review, there are many places where there's a hint at an interaction between interest rate levels and climate change or climate policy. And in light of the fact that we have a big literature that will be discussed later in this conference on the following natural real interest rates. Let me show you an example of that here. That would be very interesting to explore further. What does it mean when interest rates have become very low? And what does it mean when interest rates are, in fact, some real interest rates may in fact be negative at this point. What does that mean for some of the conclusions that the literature surveyed in this paper draws? And I want to bring two examples that I have in mind. And the first one is the fact that this IOTC approach to the optimal carbon price path links the carbon price path to the interest rate. Well, what if that interest rate has, in fact, turned very low or even negative? Would that mean that we in some optimal scenario would want to have carbon prices that are front loaded, that are much higher to begin with and that are actually dropping over time so that we front load the abatement cost? That would be a question. Another question is that the literature view shows that some asset pricing literature suggests that when we have increased climate damages, when the global warming proceeds, we may have more volatility. And this could lead to an increased design for saving for precautionary reasons, for instance. And there are other channels like that, that the climate could affect the natural real interest rate because it might raise desired savings levels. So is there an association between climate change and the natural real interest rates? Because that would have, of course, important implications for monetary policy space going forward. So those are some of the main comments I wanted to draw. Let me just conclude and say that this was a very nice and very interesting and I think a very important paper. It looks at vast and expanding literature and I think it has important implications for natural financial policies. First of all, it is very clear from the paper that fiscal tools and particular carbon pricing is first in line and central for achieving this cost-efficient transition that we're aiming at. But the literature also makes it clear that central banks have a stake in the transition and will respond to that because it affects the economic and financial stability outcomes that we care about according to many mandates. And I think I will stop here. I think that might out of good points to financial stability and implications of climate change. Before going back to Professor Bander-Ploig, just to remind the audience that if they want to ask any question to American in points, they should raise their virtual hands. So Professor, I don't know whether you want to make any comments with respect to the discussion. Yes, it would be very nice. My first comment is to thank you very much for your kind words and for your interesting questions. So the first point, yes, it is true that politicians have a tendency to procrastinate. And I say that, literally, as my experience when I was in government, so we agree to Paris and you come home, you take a big picture. But then, of course, the carbon pricing is always, preferably in climate policy, is always kind of delegated to your successes. So there's always this tendency that you start with carbon pricing much too low. And then, as Signe says that, that means that you have to do much more later on. You have to kind of ramp up your climate policy later on as you showed in the graph. And then the paper talks a bit about that how costly that is. So the delay of doing that, if you still want to reach your target of two degrees and stay underneath it, and if you're starting off too slowly, it's very costly, it is hugely costly and it's a very stupid thing to do. It's the same thing as with the pandemic. If you want to solve the pandemic, it's best to take action when it hasn't really taken hold of a large part of the population yet. So if you do it quickly and strong, that's much more efficient. And if you wait later, then people get locked into the wrong type of technology, they get locked into the wrong type of capital, it becomes much more costly. So this is an extremely important point. And it's maybe it was a bit snowed under in the paper, but I think it's extremely important to make. And I think it is something more for the governments to think about it, but it is really important. Then you mentioned those tweets. I didn't know that in the financial times. And I think that's really interesting because you showed that for between 2010 and 2017, it was all almost nothing. And then it really exploded. And then it came down a bit during the pandemic, but really that's very similar to the paper I discussed where on climate awareness. So what you see that as more tweets, more FT, and you see this also from harvesting the internet with the linguistic machine learning techniques, you see also this sudden increase, this increase the last so many years. So what people have shown is that in a followup to the Bolton and Caspicic study is that as climate awareness becomes more important, then investors, they are more aware of the transition risk exactly as you see. And then they demand a higher rate of return on those assets which are most subject to carbon transition risk, i.e. steel, cement, the oil industries, et cetera. So I think there's some empirical evidence coming up now a bit proper, yeah, proper econometrics and also allowing for all the usual suspects that as you introduce climate awareness, that it's priced in more if you want those risks. And that wasn't the case maybe 10 years ago or even five years ago, but it's greatly being priced in more and more. So that's in a sense good because then people can take actions and then people eventually will help to get a more efficient allocation of capital across the different sectors. Now, I like your, and I very quickly, your final points about the interaction between interest rates and climate. And so you mentioned that we have maybe the secular stagnation or maybe for whatever reason whatsoever, real radiates of interest have become very low and then of course, that's the case. Then you would expect that you would want to price carbon much more either because of the big moving approach for suppressing this kind of value of damages is very high or if you take the IPCC approach, then you will have a much lower increase in the path of carbon prices. And therefore you by necessity start off much higher. So you do much more upfront, you call that front loading and that's comes out exactly out of those stuff. So maybe I should have highlighted it a bit more but that's exactly what you get. So, but a final point you say, well, what happens if the rate of interest goes negative? Well, what I try to argue in the paper is that what's relevant is the risk adjusted rate of interest. And although the safe rate of interest may be negative or may be close to zero. And I want you allow for the risk premium because damages are strongly correlated with the future state of the economy or even new IPCC approach, you get the same type of story. You want to add a risk premium and then typically rather than zero percent it may be free of 4%. But it'll be lower. But it won't necessarily be so at current figures it won't be negative. But yes, those interactions between climate policy and real rates of interest are very interesting and in the revision maybe I will say a bit more on that. So thank you very much. Thank you. Thank you. We have, you know, now two participants that want to ask questions. The first one is Helen Ray and the second one is Harald Oldlich. So we can, if you can, you know, we are going to bundle together both questions. Afterwards you can respond to both of them. Helen, do you have the floor please? Thank you very much. And thank you very much for the very rich presentation and discussion. Rick, in your paper you tend to oppose price and quantity approaches. But you also note that it may be time for institutional innovation and the creation of a carbon central bank as discussed, for example, by Jacques Del Plain, Christian Golié, or the creation of maybe carbon councils as discussed in our report of a group of 30. Now, this type of new institution could use models mapping carbon permits issuances and carbon prices and target a certain carbon price path consistent with a path of carbon issuances in order to reach net zero in 2050. Of course, this mapping would be conditional on an economic model of climate change at a certain point in time. But if one thinks about it this way, I think this would make the job of such a carbon council very similar to the job of a central banker. It would be about targeting a price path with forward guidance. And I think doing this this way would be particularly beneficial because it would give credibility and predictability to the carbon price path, which are both key if one wants to unleash green investments. So do you think that this type of institutional innovation, a carbon council model really like an independent and accountable central bank with a mandate of net zero in 2050 set by the government would be a good way to implement climate policy? And second question, if some jurisdictions were to go that way and to have very active climate policy, then carbon adjustment charges that the borders are really key given the geographical distribution of greenhouse gas emissions, which are very unequally distributed around the globe. So how would you implement them on a subset of carbon intensive goods on all goods? How do you measure the carbon content? Thank you. Thank you, Alan. Harold, you have the floor. Harold, we have some problems with the connection. So perhaps we can go first to the question asked by Alan to the points made by Alan. Rick. Thank you very much, Alan. These are very good points. So the idea for an independent emissions authority or a carbon central bank or a carbon council was originally made by Cameron Haburn and Helm and Mash some 10 years ago. And it's been made again in a number by journalists and also by Golié for France. And I also, I should have also referred to your carbon council paper on the G30. So I think, so we agree on that. I think that's very, very important. I think also the idea that's to work out particularly the mandate for that is if you target the idea that the emissions have to come down to zero by 2050, then associated with that is a carbon price path. And you want to give that particular mandate to that council. And you want to take it out of the hands of politicians and you want to say, just like you give it to a central bank, you give the mandate to keep inflation below 2% or whatever you want. In a sense, on a global level, you would give the mandate to keep the temperature below one half degrees, but say maybe on a more European level or something like that, you would indeed mandated it to do whatever carbon prices are necessary to make sure that cumulative emissions go down to zero by the year 2050. So I completely agree with that. And I think that would be the most important institutional innovation we could do. And it really would help because my experience in politics is that every time you want to price it, it gets down the wrong way. It doesn't get down, it gets done too weak, it gets down too late and it gets done with too many exemptions. So that's really why you wanted to have it out of the hands of politicians and give it to an independent authority. We have these papers, I think by Alassina and others on bureaucrats versus politicians. And this is a clear case where it should be delegated away. So your second point is that of course, if you go with a subgroup of countries like that, even if it's just all of Europe, but even then, you'd have to do something with the border. So the first best would be to have border tax adjustments where you would have basically any imports from abroad that do not tax that stuff. So that have a lower carbon tax than in Europe. Then you would have to compensate for the difference and you would have to levy that tax at the border. By now, there are quite a few papers on that who try to analyze that. There's a particular Caroline Fisher has done some work on that. And where they look at the particular features on how you can do that best. If you can't do the border tax adjustments or if they're not compatible with the WTO, I think they are compatible with the WTO, but if they're not, then you come to second best policies where you price carbon vigorously, but you then governments may give some subsidies to steal and cement in order to get an efficient outcome. That's been worked, that's been done by Merida Foley, has done good work on that for the cement in Portland and then facing imports from Mexico. So that will be second best policy, but that really is another crucial aspect of climate policy. Otherwise, if you don't solve that problem, there will be just too many lobbies from carbon intensive industries which will basically make sure that your whole climate policy will not even get a start. As far as a minister of finance, a minister of social affairs is concerned, let alone a minister of climate. So thank you very much for the question. Thank you very much, Rick. I don't know, Signe, if you want to add anything. I have nothing to add. Very good. So let's try now Harold Oudlich from the University of Chicago. Harold, you have the floor. Yeah, can you hear me? We can hear you. Can you hear me now? Yes. Okay. Yeah, so excellent presentation, Rick. I really loved it, so many points. I want to sound the note of caution on these expert committees and maybe by extension, odds on the role of monetary policy here. It's going to be very hard to create policies that achieve a Pareto gain where everybody gains, right? Often whatever choice are made, there will be trade-offs. Some will be better off, some are worse off. So if monetary policy gets in the act of these expert commissions gets in the act of setting policies, what do we tell people that lose jobs? What do we tell industries that go down the drain? What do we tell voters when they feel they don't ever say in how all these policies affect them? I'm a bit worried that we take mandates that have been there in order to safeguard the financial system in general and to safeguard the price system and tailor them to specific policy agenda. However, that may have been meant. So maybe Rick, if you can reflect on that a little bit more whether you're worried or not that taking these processes out of political hands is a good or bad idea. I'd like to hear a little bit more about that. Very good point, Harold. Rick, Signe? Yes, I think this is an extremely important point and because of the shortness of the presentation I couldn't go into those details. It is of course true that if you hand over the carbon pricing to an independent authority or to a carbon council, then somebody will need to collect the carbon tax revenue. So I presume that one way or another the carbon tax revenue or the permit revenue or whatever it is goes back to the member states or to the participating states. And they need that because as you rightly say you'd want to avoid yellow vests as well. You don't only want to kind of have all kinds of dirty imports from abroad. You want to avoid that but you also want to avoid that in as far as these carbon taxes are seen to be, it's not about taxation. This is really, we are really bad on language as economists. It's really about shifting taxes. It's really you want to tell the narrative, politicians should be able to tell a narrative. No, we're not taxing you. We're just putting the burden somewhere. We're putting the burden on those things that are dirty too much other things which are more good for the economy or our cleaner. So really the revenue should go back to the private sector. And then particularly done in a particularly way it needs to be designed in a way that it really helps those who are hurt most by it. So and otherwise we get the, you're feeding the seeds of populism and quite rightly so because then it become unpopular and people will protest. So the money, and we've seen many cases that if you, so in separate papers by myself but others as well if you recycle some of the revenue partially in the lower income tax but partially invisible carbon dividends. So you give people sums of money which they're visible even before you start pricing carbon then you can get them across the line and you get political majority. And that aspect the political economy of carbon pricing is something we really need to think about but that can be separated from the monetary the systemic risk responsibilities of central banks and from the need to price carbon but then to make sure that you get a majority and that you make sure that people don't go down the drain and that people don't feel that they're left behind you need to do something on that front. And indeed a large part of the literature is exactly on that and that's a lot of my work has been on that as well. So I think it's a very important point, thank you. Thank you very much, Rick, Cygne. Let me just ask this also a question of which tools are appropriate to use for what goals? And I think if we're concerned about redistribution which of course we are and the question is which tools should be used and often we will think of the tax and transfer system for that. So there should be a clear division of tools and goals that's also part of this discussion. Yeah. Thank you, Cygne. Well, you know, I just remind you that to the participants if you want to make a question to ask a question please raise your visual hands. So the next question is going to be posed by François Billrois de Gallo, the governor of the Bank de France. François, you have the floor please. Thank you very much, Rick. Can you hear me? Perfectly. Okay. Thank you very much, Rick, for your presentation and thank you for quoting the NGFS network for reading the financial system which as we are aware is a European born object more or less. I have a good news to share with everybody that Randy Quayles, vice chair of the US Fed announced yesterday in the Senate Banking Committee that the Fed would apply to join the NGFS. And I think it's a significant game changer. We can rejoice about that as we know that the DNB is sharing the NGFS the Bank de France is holding the secret I had. So I wanted to share this good news. And perhaps to come to our discussion I will focus perhaps on the question of the link between central banks and climate change and monetary policy and climate change. Why should we care to put it in a nutshell? I tend to conclude from your two presentations but tell me if I am right that there are at least two reasons. The first one, Rick, is obviously inflation. I don't know if we will come to a common price as high and growing as quickly as you suggest. There are political difficulties as already mentioned. But it would be extremely significant on the inflation journey which is ahead. We know there are already effects of climate change in the short term in the economic outlook. Look at the level of the Rhine, et cetera. But you give us probably with these figures the best proof that dealing with climate change is not mission creeping for us. And my conviction is that we don't need to change our mandate. Our mandate is price stability. This issue of carbon price would affect it very significantly. The second reason, and here I refer more significantly to your presentation is this question of risk pricing in financial markets. And Christine Agat said it some days ago. If financial markets don't price correctly the climate risk. And I think it's a case. It's really a worry for us. Perhaps the level of interest rate is misleading but at least the value of each class of assets is misleading. And here our answer could be a more differentiated monetary policy perhaps. I refer to our assessment of collateral. We have at present a financial assessment of collateral which is fully needed and warranted. But we could have, and I would tend to say we should have also an assessment of the climate related financial risk which is in the collateral. And this would be a very powerful trigger for financial markets to incorporate this kind of risk. I will stop there. Thank you very much, François. Rick. Well, I'll be very quick. I think I'm very happy that now with the elections in America that the Fed will join the NGFS. That's a major factor. That's really a big signal. So that makes me very, I'm happy already today. So that's good. So I also think that your point that the carbon price you may add to inflation, inflationary pressures, that's exactly what a beginning literature is beginning to focus on and then how that would affect your monetary policy. So I think that's a particularly important thing to look at. I discuss in the paper differential collateral policies. So if you have, if people put up a collateral which is maybe a coal-fired power station, as we know that is coal-fired power station, at some point have to shut down maybe before the end of their economic lifetime, then it may not be such a good collateral as a collateral, maybe in a wind farm. So obviously to think about these issues is incredibly important. So I'm glad you re-attracted. So thank you very much, and I'll get to you. Thank you very much, Rick, Cygne. You are a central banker for sure that you want to add some. So let me say that I fully agree with some of these reasons why we as central banks should care about this. It is because climate change and I just reiterate, climate change is affecting economic outcomes and by this I mean perhaps in the inflationary process and it also will affect financial markets and concerns about financial stability. And this issue of risk pricing is key and that's why I also focused on that in my comments. But first on inflation, I think that this is also a point that is really interesting to understand better. I know that this is one of the topics that are also being looked at in the network for bringing the financial system and we really need more analysis of this point and I know that that's ongoing. So I fully agree with the importance of this point. This point about risk pricing and collateral frameworks, I think that it's really important that collateral frameworks are reflecting risks appropriately. And if we do think that risks are not reflected appropriately then they should be and then we need to take into account these underpriced, supposedly underpriced climate related risks. And I think that there's not much doubt about that. The issue is how? And that was one of the things that I tried to talk about in my comments is that if we have the problem of underpriced risk in market, it's very much related to a lack of transparency information and there's a lot of work going into trying to increase transparency and to come up with taxonomies to better be able to compare and contrast different risks to come to improve reporting requirements so that we get more transparency that we can use for risk pricing. But these problems that are causing the mispricing in markets are also problems when we need to assess the mispriced risk. For instance, now we apply them in collateral frameworks and that was a question that I posed to Rick and I would very much also welcome if the literature has anything to say about that because I think here the devils in the details is how do you actually implement something like this? Thank you very much, Signe. I think that we have time for a last question. Lugresia Roslin from the London Business School. Lugresia, you have the floor, please. You know if you can hear me, can you hear me? We can hear you. Yes. Thank you very much. Yes, I wanted to follow up from the point that was just made. I think that whatever you want to do in terms of collateral or also in terms of financial stability monitoring needs data and needs, you know, data on how, you know, these risks affect the values of the company. And for that we need to go from recommendations which are there on how companies should take in consideration climate-related risks. I'm here thinking, for example, of the task force, the TCFD task force, which has issued several recommendations but we have to go from that to standards and to mandatory standards so that we can have auditable information. And, you know, from that we will have, you know, that will follow provisioning and everything that has to follow which is necessary for financial stability. So I think that this is also requires a piece of new, you know, new institutional build-up in the financial architecture. So we need, you know, standard setting on climate-related risk. And it seems to me that this should be very, very high in the priorities in this agenda. Thank you, Lugresia. I think that, you know, this point about mandatory disclosure is key. But, you know, I would like to listen to Rick and to Signe. Signe, do you want to go first? Let me just come and say that I fully agree on the premise that we need more information and more transparency. And I know that there is a lot of work in this direction. We also have the task force on climate-related financial disclosures. I think that there's a lot of work in that direction and I fully agree that we need to take further steps and, yeah, I will leave it at that and hear what you have to say, Rick, on that point. Yeah, I think the work on collateral and on loans and the data, there's some interesting people, I'm thinking with people I met at Chini and Geolomantry Economics where they're working on this issue. So you could think of those frameworks also to look at climate risks. And I think therefore the biggest important thing is to get a correct data set up, as you say, and to get a kind of particular institutional set up which makes sure that it's all collected in the same way. There are data on loans and there are data on collateral and indeed in Oxford we have them via Ben Goldekot who's doing a big thing on stranded asset but also on these loans data. I think also sometimes in collaboration with the NGFS but that really needs to kind of now link up with the best researchers in the field, monetary and finance researchers to exactly tackle those questions. So I'm very happy with your precious comments. Thank you. Thank you very much, Rick and Cygne. Thank you very much for your presentations, for your comments. I think that this has been extremely insightful debate. I think that a lot of issues have been raised. I think that climate change is going to be a key issue not only for fiscal authorities but as well for central banks. And in that respect, I think that this discussion is going to shed light to some of the main topics that we will be dealing with over the next years. Thank you very much again and you know, Thierry, I don't know whether you want to announce anything. Yes, indeed. Well, thank you very much indeed for this session on climate change. We'll now have another break for 15 minutes and resume at five sharply. Meanwhile, don't hesitate of course to cast your votes for the young economists. So see you soon. My name is Chrissie Giants. I'm 28 years old and I'm from the Netherlands. Ciao. My name is Antonio Marci. I am 29 years old and I am from Italy. Ni hao. My name is Indio Chi. I'm 32 years old and I'm from China. My work studies monetary policy in economies with domestic and international production chains. I'm interested in the interaction between monetary policy and financial stability. My research is on the role of information choice in macroeconomics and finance. I'm interested in finance and development. I do research in banking and copy finance. Work is about the policies of the European Central Banker which directly affect the risk premium on the sovereign debt of peripheral countries. I study how long-term investors change their bond haulings after a shift in regulation and how these changes subsequently affected interest rates. I found that savers choose to get more information about which bank or product they should use to their saving in recessions. My work explores how voter preferences determine financial regulation, focusing in particular on the role of political connections in this process.