Garth Heutel, Georgia State University – Financial Regulation and Climate Change

What can financial regulation bring to the climate change fight?

Garth Heutel, associate professor of economics at Georgia State University, follows the money.

Garth Heutel is an Associate Professor of Economics in the Andrew Young School of Policy Studies at Georgia State University and a Research Associate at the National Bureau of Economic Research. He studies energy and environmental policy, behavioral economics, public economics, and the economics of nonprofit organizations.  His research has been published in the American Economic Review, Review of Economics and Statistics, Journal of Public Economics, The Economic Journal, Journal of Environmental Economics and Management, and elsewhere. He earned his PhD at the University of Texas at Austin, and he was previously a faculty member at the University of North Carolina at Greensboro and a postdoctoral research fellow at Harvard University.

Financial Regulation and Climate Change

Can financial regulators help fight climate change, and should they?  Typically when people think of climate policy, they think about regulations like carbon pricing or subsidies to renewable electricity.  And when people think of financial regulators, they think about regulating big banks and monetary policy.  But there is a growing discussion both in the policy community and in the academic community about the role that financial regulators could have in climate policy. 

Many financial institutions have a large stake in fossil fuel companies and in other firms who are likely to be targets of climate regulation.  When such regulation comes, some people worry that the effect of that regulation on the valuation of these assets held by banks may lead to financial instability, so there is a call for financial regulators to prevent this.  Furthermore, financial regulation could conceivably be tailored to address climate change, for example by providing explicit or implicit subsidies to banks that hold assets in “green” firms.  In a recent working paper that I wrote with my colleagues Stefano Carattini and Givi Melkadze, we explore the relationship between these two regulatory areas using an economic model that includes both climate change and a financial sector. 

We find that climate regulation may indeed lead to financial risk, but that financial regulations can reduce this risk.  The “too big to fail” argument does not prevent us from being able to fight climate change.  We also find that financial regulation alone is ineffective at addressing climate change, and more direct policy like a carbon tax will be more effective. 

Read More:

National Bureau of Economic Research – Climate Policy, Financial Frictions, and Transition Risk