European governments face a widening gap between necessary climate adaptation investment and what their fiscal rules permit. Climate-driven catastrophes are growing in frequency and severity, and economies facing that gap may become exposed to a climate sovereign doom loop. Governments compensate for uninsured losses and finance reconstruction, so public debt rises and borrowing becomes more expensive. Tighter financing crowds out the adaptation that would reduce the next loss and passes through the banks and insurers holding sovereign debt. Each successive event meets weaker balance sheets.
Karl Naumann-Woleske will present joint work assessing this loop with EIRIN, a stock-flow consistent macrofinancial model of Italy extended for the first time with an explicit catastrophe insurance sector. Under single events, pre-funded insurance protects public debt at the cost of the insurer's capital, which returns to firms as the insurer reprices. However, under repeated events, the weakened insurer and thinner coverage widen sovereign deficits, lifting yields and marking down both bank and insurer balance sheets, which tightens credit and contracts coverage further, activating the sovereign feedback loop.
Moving from the impacts of climate damages to the financing of adaptation, Karl will present his current project, STEER, which builds a multi-regional stock-flow consistent input-output model of the EU-27. It asks what effective fiscal capacity member states have for adaptation and transition investment, and where coordinated European instruments outperform national programmes.
About the speaker:
Karl Naumann-Woleske is a post-doctoral researcher at the Institute for Ecological Economics, WU Vienna, and principal investigator of the FWF ESPRIT project STEER on green industrial policy and European macro-financial resilience. He holds a PhD in Economics from École Polytechnique, and an MSc in Financial Economics from Oxford. His research develops stock-flow consistent and agent-based frameworks to climate and fiscal policy questions, together with methods for understanding large macroeconomic models. He has worked on the NGFS short-term climate scenarios, the IMF's Financial Stability Assessment Program, and maintains MacroStat, an open framework for building and analysing macroeconomic simulation models.
Registration:
Registration will open shortly. Please contact complexity@inet.ox.ac.uk if you have any questions in the meantime.