Climate change: towards policy coherence

The fifth assessment report of the Intergovernmental Panel on Climate Change, being released in sections from late 2013 through 2014, is rekindling public interest in climate change. With controversies over the previous report (2007) out of the way, advances in knowledge since then and some improvement in procedures, the findings of the latest report appear more robust. Even though many uncertainties remain, the evidence base for policy is compelling

The atmosphere, the Paris Agreement and global governance

The 2015 Paris Agreement on climate change set a remarkable precedent for speed of entry into force of a global treaty. With the threshold of 55 parties and 55% of greenhouse gas emissions being reached within a year of its adoption, the agreement entered into force before the following Conference of the Parties (COP22) in Marrakech (November 2016). By the end of COP22 there were over a hundred ratifications. This was both a vote of confidence in the agreement and a sign of the strong international commitment to tackle climate change. Less obvious is the fact that the agreement reflects a new model of international governance of climate change, in which the role of the central legal instrument has changed. It is yet to be tested, but these early signs of confidence augur well.&nbsp

Money Market Funds, Shadow Banking and Systemic Risk in United Kingdom

Shadow banking entities have been repeatedly charged with the breaking up of the recent financial crises. This paper examines the contribution of the money market funds, an important part of the shadow banking entities, to the systemic risk in United Kingdom by using the CoVaR methodology (Adrian and Brunnermeier, 2016). Using a sample of 143 money market funds, continuously listed between 2005Q4 and 2013Q4, we investigate the impact of institutional corporate variables on the systemic risk. Our results show that liquidity mismatch increases the average systemic risk over the whole period, but decreases the risk during the Great Financial Depression

The Plight of Modern Markets: How Universal Banking Undermines Capital Markets

© 2016 Banca Monte dei Paschi di Siena SpA This paper explains the process of competitive deregulation that led both the US and the UK to embrace universal banking and to abandon the functional separation of financial activities that had long characterized their financial systems. The paper argues that some of the consequences of favouring universal banking over functional separation that were understood in the 1930s were rarely voiced in years preceding deregulation. The principal argument offered in favour of separation was that the commercial banking system, which is supported by a government ‘safety net’, needs to be protected from the risks inherent in investment banking. By contrast, this paper argues that functional separation played an important role in protecting capital markets from the banking system. Universal banking is associated historically with thinly traded stock markets, and this paper argues that universal banking promotes the formation of a small group of large dealer-banks which dominate the financial system and whose interests are best served by trading on nonpublic over-the-counter (OTC) markets. The paper finds that just such a group played a key role in the growing importance of such OTC markets in the US over the past few decades. The paper then argues that the benefits of the greater liquidity that large universal banks can provide to capital markets are offset by the dangers they create when they err. Because mistakes at these large banks are often allowed to grow in size to match the size of the banks, they distort prices on financial markets and sometimes create systemic risk. Two recent examples are given: J.P. Morgan Chase Bank's ‘London whale’ fiasco and UBS, Merrill Lynch and Citibank's exposures to subprime mortgages. Finally, the paper explains that the Senate Report on the Glass–Steagall Act indicates that the Act was designed in part to limit commercial bank participation in the margin loan market, as this activity makes possible a feedback loop between increases in the money supply and increases in asset prices, which in turn can generate an asset price bubble in capital markets. The recent crisis has led modern researchers to rediscover the relationship between margin lending, feedback loops, and asset price bubbles that was well understood by at least some legislators in the 1930s. The paper argues that the recent crisis demonstrates that modern banking regulation needs to be informed by an understanding of the consequences that may arise when a financial system is dominated by universal banks

Methane and the Paris Agreement temperature goals

Meeting the Paris Agreement temperature goal necessitates limiting methane (CH4)-induced warming, in addition to achieving net-zero or (net-negative) carbon dioxide (CO2) emissions. In our model, for the median 1.5°C scenario between 2020 and 2050, CH4 mitigation lowers temperatures by 0.1°C; CO2 increases it by 0.2°C. CO2 emissions continue increasing global mean temperature until net-zero emissions are reached, with potential for lowering temperatures with net-negative emissions. By contrast, reducing CH4 emissions starts to reverse CH4-induced warming within a few decades. These differences are hidden when framing climate mitigation using annual ‘CO2-equivalent’ emissions, including targets based on aggregated annual emission rates. We show how the different warming responses to CO2 and CH4 emissions can be accurately aggregated to estimate warming by using ‘warming-equivalent emissions', which provide a transparent and convenient method to inform policies and measures for mitigation, or demonstrate progress towards a temperature goal. The method presented (GWP*) uses well-established climate science concepts to relate GWP100 to temperature, as a simple proxy for a climate model. The use of warming-equivalent emissions for nationally determined contributions and long-term strategies would enhance the transparency of stocktakes of progress towards a long-term temperature goal, compared to the use of standard equivalence methods. This article is part of a discussion meeting issue ‘Rising methane: is warming feeding warming? (part 2)’

Indicate separate contributions of long-lived and short-lived greenhouse gases in emission targets

European Union funding: 821205, 821003, 820829. Wellcome Trust: 205212/Z/16/

Indicate separate contributions of long-lived and short-lived greenhouse gases in emission targets

European Union funding: 821205, 821003, 820829. Wellcome Trust: 205212/Z/16/

The road to Durban and beyond: the progress of international climate change negotiations

Following a familiar pattern of UN climate change negotiations, the 2011 Durban conference of the parties (COP17) was concluded by sleep-deprived delegates well after its scheduled end, after crises and last-minute drama. Just what it might mean for the future was not immediately obvious to observers. Early reactions ranged from seeing yet another failure by governments to grasp the seriousness and urgency of climate change – ‘a disaster for us all’ – to much more positive assessments. The executive secretary of the UNFCCC (the United Nations Framework Convention on Climate Change), Christiana Figueres, described Durban as ‘without doubt … the most encompassing and furthest reaching conference in the history of the climate change negotiations’.&nbsp