Mark Cliffe’s Post

Governments should target national wealth, not debt. After decades of debt-distracted neglect many countries are now finding that running down assets to pay off debts, often with botched privatisations, has undermined their finances. Indeed, in a new article for the London Evening Standard, I argue that making cutting debt the overriding priority is fiscally irresponsible. Focusing on the UK, I suggest that the UK Labour Party should target annual changes in public sector wealth. The key points are:    ·      Politicians generally agree with economists in saying that investment is a Good Thing. ·      The problem is that their fiscal rules, focus on debt rather than what really matters, the nation’s wealth. ·      We need assets if we are to grow the economy and cover our debt. ·      In the UK both the Conservatives and Labour have cut back on their public investment plans. ·      Setting annual targets for the change in public sector net wealth would transform government: o  by creating incentives to nurture assets that they control and use, starting with measuring them properly.   o  by dramatically improving the way that government is perceived. Aside from being in tune with Labour’s emphasis on wealth creation and its fiscal rule of 'borrowing to invest', such targets would set a hopeful tone to counter the current gloomy national mood. o  by lowering the government’s interest costs, as the financial markets would welcome genuine fiscal sustainability. Lower funding costs would in itself boost national wealth over time, and lower the cost of increased investment. Ian Ball Dag Detter Rt Hon Rachel Reeves MP Spencer Thompson Neil Amin-Smith Will Hutton David Smith Faisal Islam larry elliott Josh Simons Mariana Mazzucato Cara Pacitti Diane Coyle Phil Aldrick Andy Haldane Chris Giles John Crompton #fiscalpolicy #UKpolitics #investment #economics https://lnkd.in/dkVv9qUR

It's good that the central banking community is beginning to deal with the reality that long term systemic impact climate scenarios focused on global warming are of little use to banks that need shorter term bespoke scenarios to deal with their financial risks and oppoortunites. These differences of scale, scope and time horizons are critical to scenario design and application. Here's the post with a link to the Exeter-USS report 'No Time To Lose' which addresses this: https://lnkd.in/edqJ8jMs

I profoundly disagree with this provocative piece from Tom Gosling: 1.     Climate risk is not just about “the impact of global warming”. While Tom acknowledges that the long run effects of global warming are being underestimated, it is clear that mainstream scenarios are grossly underestimating the effects of other chronic and acute physical risks, not just in the long run, but also in the short run. As others have noted, extreme weather events are rising rapidly and the prospective dates of chronic climate tipping points are being brought forward. This is even before we begin to factor in the short term transition risks that are routinely overlooked by mainstream scenarios.   2.     Financial markets are concerned about climate-related financial risks. So on top of extreme weather events, financial markets face increasing transition risks from anything that could trigger a correction in the prices of high-carbon assets, which could accelerate their stranding. This would include the political tensions, wars and recessions that are referred to in passing in the piece (recall what happened to the value of the oil majors in 2020). I would also be more concerned about the possibility of more major mistakes or reversals in climate policy in the next few years. 3.     Minsky moments relate to sharp adjustments in market prices, not valuations, which are theoretical constructs which have minimal predictive value (particularly in the short run). It is easy to construct scenarios with sudden shifts in market sentiment in response to extreme weather events and disruptive changes in geo-politics, policy, technology, and consumer behaviour. Such shifts could wreak substantial systemic damage with lasting consequences. Neo-classical economic models based on notions of long run trends, cycles and shocks are singularly ill-suited to the structural disruptions that lie ahead. To get more a flavour of these ideas, please take a look at the University of Exeter’s latest report, produced with the support of USS, entitled ‘No Time To Lose’, on which I’m the lead author. This sets out a range of scenarios to 2030 which indicate the potential for enormous climate-related financial market volatility: https://lnkd.in/edqJ8jMs Mike Clark Sandy Trust János Hidi Louie Woodall Mirko Cardinale Jack Oliver Nigel Topping, CMG Ronan Hodge

The NGFS ‘Conceptual note on short-term climate scenarios’ could be a game-changer. ‘Planet NGFS’ is now looking more like the real world. In shifting to short term, 3-5 year, scenarios, it has confronted some of the limitations of its long term scenarios:   ·      different drivers are involved ·      chronic physical risk is a ‘predetermined’ ·      smooth pathways need to be replaced with volatility and non-linearities ·      financial market expectations and stress are key ·      greater sectoral and geographic granularity will be needed   These are welcome points which the Real World Climate Scenarios Initiative has been emphasising. The new NGFS scenarios based on this thinking will likely reveal much bigger risks and opportunities. But while their primary purpose is to support stress testing and macroeconomic forecasting, there is still some way to go to make them practically useful for transition planning:     1. Economic growth is not just an impact, it's a driver  NGFS made a fateful decision when it began to use just one baseline economic growth pathway. Yet growth is a key driver of emissions and source of shocks in politics, climate policy, technology and consumer choices. Short term scenarios need to consider different GDP pathways.   2. The coming disruptions are still being underestimated.  Although the NGFS recognises non-linearities, it still has an equilibrium mindset in which 'shocks' are largely cyclical disruptions around a trend. Yet we are not only hurtling towards critical climate tipping points, we must consider political, economic and technological tipping points, both negative and positive.   3. Politics is the elephant in the room Political polarisation, which has seen some countries not merely delay policy action on climate, but reverse it, has to be confronted. Major questions, not least about tension between the West and China and/or Russia, and between energy exporting and importing nations, are left unasked. Politics, not policy, is the key driver of climate scenarios alongside economics.    4. There is still a presumption that the transition will be inflationary  NGFS equilibrium thinking is reflected in a belief that policy-driven resource reallocation leads to inefficiency, higher prices, and lower growth. This, inadvertently supports the political backlash against ‘Net Zero’ policies.   The report's appendix raises possibility of a positive green productivity shock, which would lower prices and raise output. Given that green technologies have plunged in price as they have grown, this possibility needs to be factored much more strongly.   Addressing these points will be challenging. Hopefully academia and business will step up to help develop more decision-useful scenarios. To that end, see the Exeter-USS report ‘No Time To Lose’, which aims to do just that: https://lnkd.in/edqJ8jMs

The announcement of the US Treasury's Principles for Net Zero Financing and Investment, albeit voluntary for now, is another call for credible transition plans. This reinforces the need for a paradigm shift towards climate scenarios based on realistic shorter term narratives. For the rest of the decade global warming is already baked in, so plans need to reflect on scenarios that incorporate volatility and disruption in the weather, geopolitics, climate policy, economic activity, financial markets, technology and consumer behaviour. Such volatility is absent from the long term systemic scenarios being used and promoted by the central banks and regulators, which has resulted in the near term risks and opportunities from climate change being hugely understated. The recently published report by the University of Exeter and USS, entitled 'No Time To Lose', provides a guide to how to go about this shift to more decision useful scenarios. It was written with the support of experts including Mark Carney Nigel Topping, CMG Jo Paisley David Carlin Gillian Tett Comments welcome! Mike Clark Jack Oliver Tim Lenton Jesse Abrams Louie Woodall Mark Campanale https://lnkd.in/eZ-zegba https://lnkd.in/epUYuNsg

It is indeed a breakthrough to see regulators embracing the need to take more account of volatility and uncertainty in dealing with climate change. For more on how to go about it, have a look at https://lnkd.in/e-kSQWqi

It’s time for a paradigm shift in climate scenarios. In ‘No Time To Lose’, the new report issued by the University of Exeter and The Universities Superannuation Scheme (USS), argues that accelerating climate action needs ‘decision useful’ scenario narratives focusing on: (a)   the real world volatility in climate – extreme weather – and in politics, economics, markets, technology and consumer behaviour. (b)  the shorter horizons relevant to financial decision-making: interim goals of halving emissions by 2030 have to be met if we are to hit Net Zero by 2050. (c)   the financial implications missing from conventional scenarios. The report presents a new set of four scenarios based on different combinations of high or low policy activism and high or low market dynamism. The most optimistic scenario, ‘Roaring 20s’, has both drivers working in harmony, resulting in rapid decarbonisation. In the most pessimistic scenario, ‘Meltdown’, a toxic political climate compounded by dysfunctional markets frustrates progress. This builds on the work of the Real World Climate Scenarios (RWCS) initiative, a coalition of academic experts and practitioners that I have been building with Mike Clark and Willemijn Verdegaal. In addition to support of our Exeter colleagues, Professor Tim Lenton, Jack Oliver and Jesse Abrams, the report drew on a 40+ team of experts from a wide variety disciplines. Special thanks are due to Mirko Cardinale, János Hidi, Mark Carney, Nigel Topping, Simon Sharpe, Caroline Cook, Marek Piskorz, Kingsmill Bond, David Carlin, Michael Bradshaw, Jo Paisley, Gillian Tett, Peter Young, Tim Buckley, Louie Woodall, and Tim Hodgson  

These are great questions for climate scenario users from David Carlin and colleagues. I’d suggest that the critical prior question is: ‘what are the scenarios for?’ Different scenarios, let alone models, are needed for different purposes. The long term systemic scenarios, for example from the NGFS, which focus on damages arising from global warming, are of little use for individual organisations’ transition plans, which focus on how to get to Net Zero emission targets. Unless you are asking the right questions, no amount of modelling with save you... https://lnkd.in/eG6nBv-T. Mike Clark Jack Oliver