SMOOTH – Sustainable Finance for a Smooth Low-Carbon Transition

The threat of climate change calls for a rapid transition to a low-carbon society. Aligning the financial system with climate stability is a crucial prerequisite for achieving decarbonization while preserving economic prosperity and societal welfare. However, we currently lack a comprehensive understanding of how the institutional and behavioural features of financial systems may affect the speed and shape of the low-carbon transition. Additionally, the coevolving socioeconomic, financial and environmental repercussions of such a large-scale societal transformation have not yet been systematically analyzed. The SMOOTH project will lay the foundations of an innovative macro-financial analytical framework to provide essential insights on the links between financial systems and decarbonization dynamics.

Duration
60 months from 01/09/2020 to 31/08/2025
Funded by
  • European Commission

Coordinating organization
  • UNIBO - Università di Bologna

CMCC Scientific Leader
CMCC Project manager
Division

General aims

General objectives
The overall objective of the project of SMOOTH is to contribute to the urgent challenge of mitigating climate change by advancing the understanding of the multiple coevolving links between financial systems and the transition to a decarbonised society. The project will develop an innovative analytical framework able to provide crucial insights on: i) how to scale up financial resources flowing to low-carbon activities; and ii) how to mitigate the risks of financial instability along the decarbonisation process. SMOOTH results will lay solid grounds for the design and implementation of a coordinated policy effort aimed at achieving a rapid and smooth low-carbon transition.

CMCC role
CMCC is additional beneficiary of the ERC project.

Activities
The SMOOTH project will lay the foundations of an innovative macro-financial analytical framework to provide essential novel insights on the coevolving links between financial systems and decarbonization dynamics. Methodologically, it will introduce a breakthrough by linking the balance-sheet approach to macroeconomic analysis with an original representation of investment decisions based on forward-looking expectations of transition pathways. In the course of five years, this integrated framework will overcome the limitations of traditional modeling approaches and will enable me to investigate dynamic decarbonization scenarios in their full socioeconomic and financial implications. It will shed light on the transmission channels through which financial expectations and behaviours might affect the smoothness of the transition and their effects on growth, financial stability, employment and functional distribution. Building on this knowledge, it will identify a harmonized set of policies to achieve a rapid and non-disruptive low-carbon transition.

Expected results
SMOOTH plans to create a new interdisciplinary field of research integrating elements from macroeconomic modeling, climate economics, political economy, behavioural finance, transition theory and political science, with the aim of developing a solid understanding of the links between finance and the low-carbon transition.

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