This is the personal website of Mark Cliffe, Visiting Professor at the London Institute of Banking & Finance, Board Advisor, Economic Consultant and former Chief Economist of the ING Group.

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Climate – The Sting is in the Tails

Why increasing volatility in the weather has more immediate impact than global warming

Source: rmets.org

Scientists have long warned that climate change will adversely affect weather patterns and living conditions around the world. These warnings are turning into a painful reality. Worse, the range of possible outcomes is becoming increasingly “fat tailed”: extreme weather events such as heatwaves, severe storms, and floods are more likely than normal statistical distributions would predict.

None of this bodes well for future political stability or economic prosperity. Our best hope is that the sharp sting in these tails will goad us into the necessary remedial action before things get even worse. But will it?

The public is increasingly aware that global warming is leading to more volatile weather. There have been record-setting heatwaves around the world this year, not just in India – where temperatures reached 49.2°C (120.5°F) – but also in places like the United Kingdom (40.2°C). France and China are experiencing their worst droughts on record, and four consecutive years of failed rainy seasons in Eastern Africa have put more than 50 million people at risk of “acute food insecurity.” Meanwhile, devastating storms and floods have hit Madagascar, Australia, the United States, Germany, Bangladesh, and South Africa.

This rising volatility in the weather is crucial. Short term weather fluctuations often have a much bigger impact than longer term trends. While temperature increases of 0.5°C here or there are barely perceptible, droughts, floods, and other short-term weather fluctuations can wreak deadly havoc. These events cause hundreds of thousands of deaths and enormous economic and financial damage each year.

Moreover, extreme weather events can cause changes that last far beyond the immediate shock and damage. Crucially, they can accelerate developments that might otherwise take many years. Scientists are increasingly worried about “tipping points” – such as the melting of polar ice sheets – that would carry us across thresholds of irreversible change. This could create damaging feedback loops between interconnected climate risks, all of which would spill over into the real economy, driving defaults, job losses that disproportionately harm disadvantaged communities, and political turmoil. 

Aside from the damage to the physical environment, extreme weather may therefore trigger abrupt and sometimes permanent shifts in social attitudes and public policy. When people start losing their homes, livelihoods, or even their lives, politicians must respond.

Surprisingly, while we are all acutely conscious of extreme weather, forecasters still widely overlook its role in accelerating structural changes. Mainstream climate scientists and economists tend to focus on the longer-term effects of climate change brought about by global warming, with an emphasis on scenarios involving global average temperature increases in the range of only 1.5°C-2°C – the targets enshrined in the Paris climate agreement. And even in higher-temperature scenarios, it is assumed that the effects – on sea levels and agricultural output, for example – will accumulate only gradually, implying that the ultimate reckoning is several decades away.

But a recent paper – “Climate Endgame: Exploring Catastrophic Climate Change Scenarios” – shows that this conventional scenario analysis gravely understates the long-term risks, because it fails to give the more extreme climate outcomes (the fat tails) the attention they deserve. As the statistician Nassim Taleb has pointed out in the context of financial markets, conventional models struggle to handle the consequences of fat-tail events, creating a dangerous blind spot in their  outlook.

Cascading Global Climate Failure

Source: Climate Endgame: Exploring catastrophic climate change scenarios – Kemp et al 2022

Higher temperature pathways would unleash what the authors call the “four horsemen” of the climate endgame: famine and malnutrition, extreme weather, conflict, and vector-borne diseases. It does not take much imagination to see how this herd of apocalyptic harbingers might create social and political chaos, especially when they are all galloping together – as is already the case today with the global food crisis, war in Europe, and the ongoing pandemic.

Worse, the mention of the second horseman, extreme weather, suggests that the more immediate risks of climate change are still being underplayed. After all, extreme weather is also a driver of the other three horsemen,  making it arguably the most important.

And crucially, it is already with us. Weather shocks cause suffering that grabs society’s attention far more than abstract (though no less warranted) warnings of long-term doom. Polls show that support for climate action is greater for those who have personally experienced extreme weather. Although the current upsurge in inflation means that people are less enthusiastic about measures that would hurt their own finances, the growing incidence of disasters is shrinking the minority that remains skeptical of climate change.

In this way, the fat tails of the weather – rather than the fat tails of long-term climate change – are far more likely to prompt action within the shorter time horizons that preoccupy politicians and business. That at least is the hope that should sustain us as the stings from these tails become ever more common and painful.

An edited version of this post was published by Project Syndicate.

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Climate Shock: time for more stressful tests on banks

Extreme weather events are becoming bigger and more frequent

There is no doubt that the central banks, supervisors and regulators recognise the urgency of climate change. This is why they are conducting stress tests on the financial risks that it poses to the banks and other financial institutions. Sadly, the signs are that the scenarios that they have so far provided for this purpose will not be stressful or shocking enough to make much difference the financial institutions’ behaviour. Perhaps inadvertently, they risk fostering complacency.

I was privileged to be invited to address this in an article for Environmental Affairs, Policy Exchange’s quarterly policy journal, published just ahead of the COP26 climate talks in Glasgow. In it I note that despite the central banks’ humility about their current modelling, their scenarios suggest that climate risk will make little difference to growth or financial losses even on a 30 year horizon.

In the ECB’s case, the cumulative total difference in GDP between their business-as-usual ‘hot house’ scenario and an orderly policy ‘Net Zero’ scenario is barely 3%. This is despite escalating physical risks and the dramatic transformation in the economy that decarbonisation will entail. This modest range of variation is against the basic essence of the scenario method, which is to explore a wide enough range of possibilities to provide strategic insights.

If the central banks wish to inject the needed urgency into the financial institutions’ embrace of climate risk the next phases of their stress testing exercises will have to rise to the challenge set by the BIS for an ‘epistemological rupture’. There are four ingredients that could feed into the rethink required; their scenarios should:

1. Focus on shorter time horizons in line with traditional solvency stress tests and the planning horizons of the financial institutions. Most of them are already signed up to being ‘Net Zero’ by 2050, so the challenge is to operationalise this now and to recognise that the financial risks and opportunities are far larger and more immediate than the central bank scenarios suggest. The ECB’s latest announcement that next year’s stress test will incorporate policy and weather shocks in 2022 is therefore a welcome step forward. 

2. Stop ignoring or downplaying crucial risks. Extreme weather events, political disruptions, policy shifts, financial markets, behavioural and technological change are all aspects that are difficult to calibrate and model. But failing to account for them severely reduces the realism and useful of the scenarios for stress testing purposes.

3. Recognise that non-linear dynamics will accelerate change, for good or ill, making the likelihood of extreme outcomes far more likely. The central banks’ models yield smooth orderly changes and fail to capture the risk that the climate may breach thresholds beyond which damages may accelerate and become irreversible or existential. Socio-political disruptions, policy shifts and market spikes and crashes could all feature in more illuminating short term scenarios.

4. Adopt a systemic approach to factor in the complex interactions between the drivers and impacts of climate change. Earth systems and the economic, financial, political and social systems are interdependent in a way that can lead to powerful feedbacks. This adds layers of uncertainty which argues for embracing the ‘precautionary principle’ by making assumptions that result in a broader range of outcomes. 

A prime illustration of the problem is that the central banks’ scenarios start from the same economic growth baseline, even though it is obvious that different growth rates and cycles would dramatically alter the evolution of climate risks. What makes this particularly odd is that macroeconomic shocks are at the heart of traditional stress testing exercises.

But the scenario method provides room to develop plausible narratives to address these complexities. The pandemic has provided a timely lesson in how nature can trigger rapid changes in human behaviour, whether it be politics and policy, markets and innovation, or social norms and consumer behaviour. In the case of climate change, official forecasts continue to underplay the fact that the costs of renewables are falling, partly through policy support, in a way that is triggering tipping points in business and consumer demand.

On the flipside, the central banks also understate how policy inertia or missteps could crystallise longer term financial risks from stranded fossil fuel assets and labour well before 2030, let alone 2050. It is time to inject some real stress into their climate stress tests.

Note: A longer version of the Environmental Affairs article will be published soon.

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Where’s the Beef? – a recipe for decarbonisation

Where’s the beef? Cutting consumption to cut carbon

Source: Gianluca Milanesi (Unsplash)

Here’s a link to the podcast of my interview by Gavin McLoughlin of Newstalk radio on “Reducing Consumption and Committing to Decarbonisation”. It was a broad-ranging conversation, touching on spending patterns, lifestyles, jobs, innovation and policy. We began by discussing the rise of meat and dairy alternatives – here are some of my key points:

The rapid growth in meat and dairy alternatives:

“Governments around the world are setting even more ambitious goals in terms of climate change, and agriculture is part of that story, so it’s not just about people’s changing diets it’s also about the warming of the planet”

“over time as more and more consumers make the switch that’s going to increase the volumes. That in itself will reduce the cost of these alternatives [and] there’s a huge amount of money going into innovation in this area which will also reduce the cost”

“this is a rapidly growing and profitable area and [producers are] going to give the consumers a further push by marketing these alternatives more aggressively”

“ the growing middle class in particular in Asia sees things like meat and indeed dairy products as aspirational products […] this is a little unfortunate when we’re trying to reduce things like methane emissions from cattle”

“it’s extremely important that we put rocket boosters in under some of these changes and we head off [..] the changes in people’s consumption habits right across the world but particularly in Asia”

“another lever here […] could be regulations which may well be focused on trying to encourage farmers to come up with methods that reduce the amount of methane that’s being produced”

“another part of [the policy response] is the dreaded ‘t’ word, which is tax. We could see some kind of luxury tax be eventually being imposed on some food items”

“historically this has been a bit of a ‘no-no’ because of course it’s something which is seen as particularly hurting the poor. But there [is a way to tackle] that problem which is to redistribute some of the tax revenues that you get from taxing for example on meat and dairy products and using that to reduce taxes particularly on poorer households to compensate them”

The cross-border challenges

“there are two different things going on here on the what one is what’s happening to consumption and the other is the competitive aspect of production. You we see this in some of the very tetchy sort of trade negotiations that we’ve had in the last few years”

“this is going to be a messy process but you have to hope that the politicians who will be getting together in the coming months on these topics will start to address these problems head on”

“there will need to be some kind of agreement amongst the developed nations to effectively transfer funds to the emerging world to help them in this transition, otherwise this is going to be a very protracted and painful process.”

The impact on jobs

“Policymakers have really got to take care of the people of losing out in this transition not just on the consumer side, poorer households who might be facing bigger bills, but also on the jobs side”

“they will have to start putting money into, for example, disadvantaged parts of agriculture [such as] the idea of paying people to conserve nature”

“this kind of stuff can’t happen just overnight you’re going to have to phase in some of these changes”

“an important principle […] is you need to front run the compensation. In other words, you need to start anticipating the people who are going to lose out in this transition and put a lot of policy energy into thinking about how you can take care of those people”

Restraining consumption

“Consumption patterns will have to change and the sad fact is and this is not an easy message for politicians to get across”.

“we can’t expect to live our lives in the way that we have in the past. We are just consuming too much stuff”

“we can’t have the planet aspiring to running around in two and a half tonne SUVs even if they are electric”

“we’re going to have to look at other policy measures which are pretty radical so, for example, let’s take cars again I think you could anticipate that eventually there’s going to be much higher taxation on bigger cars”

“we need to get into position where the default position is actually I just need a vehicle that’s fit for purpose. Because the vast majority of people are travelling around either on their own or with just one passenger and for most journeys a small vehicle is perfectly adequate. If anybody wants to use a big vehicle for longer trips they’re just going to have to start thinking about renting them”

“ we’re going to have to start thinking about lifestyle changes as well there’s no way around the fact that lives will be transformed by the decarbonization”

Green credits

“the idea here is because you could be generating quite a lot of revenue from these taxes why not start to compensate some of the people are losing out in this transition by giving people flat rate credits up front”

“poorer households in essence would potentially be net beneficiaries from this package because the flat rate credits would be worth more to them than it would be to richer households who obviously consume a lot more of goods and bigger houses and other things that would be subjected to much heavier taxation over time”

“it’s not something that could happen overnight it would have to be phased in and there be obviously a huge amount of fuss about this, but the good news is I think we’re beginning to see people change their attitudes”

Will it happen?

“I’ve putting these ideas forward just to try and provoke debate and hopefully get people to tune into the idea that there are radical policy measures that could be enacted”

“it is no good NGOs just pointing the fingers at business. Business has got its part to play for sure but in the first instance it’s a case of market failure where policy needs to change”

“…whether that’s regulation or taxes and subsidies or massive public investment that has to happen in a big way over the next few years”

“the longer we leave it the bigger the challenge will become”

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How Green Credits might ease the way for Green Taxes

My video contribution to the Royal Society’s #2050challenge for #NetZero argues the case for green credits to ease the way for progressive consumer taxes on resource-intensive goods.

We need to do more than decarbonise: we are over-exploiting the earth’s resources in general. We need to give up on the idea that we can tackle this without tackling the world’s growing demand for ‘stuff’. The good news is that curbing resource use would also accelerate progress towards Net Zero, by reducing embedded energy usage and the scale of capital investment needed to decarbonise the world economy.

Like any tax, progressive consumption taxes would also face resistance. But since many governments are not in immediate need of more tax revenue, and can borrow cheaply, the prospect of higher green taxes could be made more palatable by giving everyone equal ‘green credits’ upfront. And since these equal payments would disproportionately help the poor, the package would be seen as fair.  

Only later would the green taxes be phased in, and green credits could be used to pay them. The taxes would also be designed to fall more heavily on the rich, meaning that after allowing for the credits, poorer households would be both absolutely and relatively better off.

The rich account for a disproportionate share of consumption of energy and resource intensive goods, and green consumption taxes could be made even more progressive by relating them to the size and weight of goods and homes. So for example, by taxing big cars at a much higher rate, say by an extra 10% on purchase and with premium fees for usage, the rich would be hit a lot harder. This would encourage people to buy smaller, less resource intensive items, or share them, or generally switch their spending towards services.

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Making Small Cool – the case of cars

My “Stuff Stuff” article argued that if we are to save the planet “we cannot and should not aspire to every household in the world owning a 2½ ton SUV”. Cars are an emblematic and critical illustration of our need not just to decarbonize but dematerialize economic activity. Electrification and energy efficiency is not enough. We have to do more to curb demand growth to help curb our net usage of resources.

This does not mean that we are going to have to ban cars and just use public transport, ride bikes and scooters or simply walk. Electric vehicles will undoubtedly help. But they would help a lot more if we weaned ourselves away from the American-led passion for big cars (see my response to Noah Smith’s post on this topic). I address this in a follow up piece to “Stuff Stuff” for Jackson Hole Economics, entitled “Making Small Cool”.

Ford F Series Pick Up

Take the comparison between the US and Japan. In the US, the best selling ‘cars’ are actually huge pick-ups like the Ford F Series, Chevrolet Silverado and the Dodge Ram. It is easily forgotten that a catalyst for the US – and increasingly global – mania for pick-ups and SUVs was successful auto industry lobbying for laxer emissions standards on light trucks back in the 1970s. ‘Shifting the metal’ marketing did the rest.

Honda S660

By contrast, the best selling cars in Japan are micro ‘kei’ cars such as the Honda N box and cooler variants such as the S660 roadster. These cars are less than half the size and weight, and a third of the price, of the US bestsellers. Again, government action, in the form of lower taxes and exemptions for kei cars, has been critical in shaping this.

Europe, where the best selling car is the VW Golf, leans more towards Japan than the US, but it has nevertheless caught the SUV bug over the last few years. Environmentalists are now fighting this bug (see here), and social pressures might start a shift in marketing fashion towards smaller cars. But progressive taxes on the purchase, usage and disposal of larger cars could radically accelerate this. And as I will argue in forthcoming posts, they would also serve to address the massive underutilisation of the existing car fleet and to replace the loss of fossil fuel tax revenues as electric vehicles take over. Making small cars cool could help us win the ‘Race to Zero’.

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“Stuff Stuff” – the Case for a Radical Greening in Taxes

We are consuming too much stuff. This is not just bad for the planet, it’s bad for our prosperity and happiness. As we look to recover from the Covid-19 pandemic and tackle not just climate change but broader environmental damage, this is a good moment to tackle this. Ramping up progressive taxes on goods – the bigger the car, the bigger the house, the bigger the tax – would fall on the rich more than the poor. The proceeds could be used to support jobs and services that would leave us all better off.   

we clearly cannot and should not aspire to a world in which every household inhabits a mansion and owns a two-and-a-half-ton SUV”

Crucially, the revenue potential for new green taxation is enormous. In the OECD countries, green taxes raised only the equivalent of 1.6% of GDP in 2014, and have been flat or declining for many years. Ramping this up would be a smart way to ‘Bill Back Better’ to pay for ‘Build Back Better’.

Take a look at my latest piece on this topic on Project Syndicate.

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New Horizons Beyond ING

My New Favourite Mug

Leaving in the midst of the Covid-19 pandemic lockdown is somehow fittingly strange and unexpected. My 22 years at ING, mostly as Chief Economist, marked an unforgettable period of shocks in economics, politics, technology, society and, increasingly, the environment. The thread running through this is what I like to call the New Abnormal. This is a world which is structurally in a state of flux, which consistently defies attempts to define a return to a ‘new normal’. When some start talking of the ‘next normal’, you know that hopes for a comforting period of stability are on shaky ground.

This line of thinking lies behind my longstanding humility about what I called my ‘day job’: macroeconomic forecasting. I provided a critique in my post entitled ‘Confessions of an Economic Forecaster . If anything, the social, digital and environmental transformations that we are going through intensify the fundamental problems for macro-economic forecasting, at least as it commonly practiced. Looking ahead, I’m going to continue to explore the implications of these transformations. And for that, I’m keen to keep drawing on a diverse range of experts and sources.

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A critical year for climate change

2021 will set the direction for a decisive decade

The coming year will be critical in setting the direction for what is widely seen as the ‘decisive decade’ for action on climate change and the UN’s Sustainable Development Goals (SDGs).

Thankfully, contrary to earlier fears that climate action would fall victim to the Covid-19 pandemic, governments and corporates are instead strengthening their commitments to net zero. News that the EU increased its emissions reduction target for 2030, from 40% to 55%, has been followed by a pledge from China to aim for net-zero carbon dioxide emissions by 2060 and from Japan and South Korea by 2050. Meanwhile, the election of Joe Biden as US President is boosting hopes that the COP26 climate talks next November will lead to accelerating progress.

Key dates for climate policy

Dec 12                 Global Climate Summit (UN/UK)

Jan 5                      Georgia Senate Runoffs (will determine control of the US Senate)

Jan 25                   Climate adaptation summit (Netherlands)

March                   China’s 5 Year Plan and Vision, 2035 outline   

Q2                          US Budget approval under new Administration

Q2                          EU legislation on 2030 “Fit for 55 Package“ and sustainable finance 

TBD                        G20 Summit Italy

H2                          IPCC Climate Change reports on Mitigation (Jul) and Adaptation (Oct)

Nov 1-12              COP26 negotiations, Glasgow UK

Q4                          EU draft legislation on circular economy

One reason why climate action has fresh momentum is that policy-makers are folding it into their efforts to achieve a ‘just transition’ and ‘build back better’ by addressing social inequality and broader environmental goals. The pandemic is highlighting the connections between people and the planet. Indeed, that’s why the SDGs are presented as being indivisible.

This was the theme of the sustainability panel entitled ‘Building Back Greener and Better’* at the recent Institute of International Finance (IIF) Annual Members Meeting, which I had the privilege to moderate. The expert panel included Ben Caldecott (Oxford University), Elsa Polanza (Barclays) and Emmanuel Martinez (SocGen). It struck an optimistic note on the prospects for action from policy-makers, corporates and financial institutions in the coming year.

The video of the webinar is now available for viewing on YouTube

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Central Bank Digital Currencies: Challenges for Commercial banks


Digital currencies are rapidly moving up the agenda for commercial banks. Although Facebook has been forced back to the drawing board with its grand Libra global currency plan, the Covid-19 pandemic is giving dramatic impetus to the central banks’ studies of creating their own digital currencies. Aside from the sudden jump in cashless contactless payments, the pandemic is sparking renewed interest in the potential for central bank digital currencies (CBDCs) to expand the monetary policy toolkit to tackle a dramatic recession. CBDCs could help get cash or even loans quickly out to people and businesses, or allow interest rates to be driven into sharply negative territory. But the implications for the role and profitability of the commercial banks could be profound.

Until recently the commercial banks were working on the assumption that central banks would concentrate on Wholesale CBDCs rather than Retail CBDCs. This would not be disruptive. Indeed, it would largely be welcome for the commercial banks. Wholesale CBDC would only be available to selected financial institutions and would improve cross-border settlements issues by speeding up transactions while reducing costs and scope for errors.

But now commercial banks are having to tune in to the prospect of Retail CBDCs being launched. The consequences could be revolutionary. Banks could find themselves competing with the central banks as well as the Big Tech companies. Indeed, some of their activities might even be taken over by the central banks. Universal access to the central bank balance sheet, and the creation of a new-risk free asset, would create new opportunities but also raise new challenges for central banks, commercial banks and financial markets.

What form CBDCs take will undoubtedly be complicated by the fact that different central banks will pursue different motives, strategies and experiments. Aside from improving existing payments infrastructures, some will also be looking to promote financial inclusion or curb financial crime and the black economy.

Big questions revolve around how the private and the public sector will divide up their roles and responsibilities. One key choice would be over whether the Retail CBDC would be exchanged using account-based ledgers or digital tokens. Another would be whether it is distributed directly by the central bank or via banks or other intermediaries. In its purest form, an account-based directly issued CDBC would be particularly challenging for commercial banks. They would find themselves competing for deposits with the central bank, which would be especially hard if the CBDC offered attractive interest rates or if a crisis triggered bank runs. It also begs the question of whether and how the central bank would make loans.

Given that central banks, at least for now, lack the resources for such a radical takeover of banking functions, it perhaps more likely that CBDC will be distributed through banks and other institutions.  This would allow the central banks to avoid much of the cost and risk of screening and servicing customers, providing complementary services (such as cards and investment products), and building and running the technology and operations.

In principle, a token-based CDBC might be the least disruptive scenario since the tokens would effectively be digital versions of cash and avoid the burden of account management and verification. However, if this were to allow non-financial players like the Big Tech companies (such as Facebook with Libra) into digital finance this would increase competition in an already highly contested market, further reducing margins and challenging the banks’ customer relationships.

The emergence of CBDCs therefore raises some deep strategic questions for the future of the commercial banks, at a time when their profitability is already challenged. This gives a new dimension to their need to accelerate their digital transformations.

A version of this article, co-authored with my colleague Carlo Cocuzzo, appeared in edited form in OMFIF’s Digital Monetary Institute’s Journal, June 2020

Further references and links:

Central bank digital currency: Central banking for all, VoxEU, April 2020

Key Aspects around Central Bank Digital Currencies Policy report, CEMLA, May 2019

Central Bank Digital Currency Policy‑Maker Toolkit, World Economic Forum, January 2020

The technology of retail central bank digital currency, BIS Quarterly Review  March 2020


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The Three Pillars of Sustainability

Sustainability Pillars

In an extended ING version of my latest piece for Project Syndicate (see previous post) I present this graphic of the three pillars of a sustainable recovery. Among others, I draw on the work of Raghuram Rajan, in his book The Third Pillar: How Markets and the State Leave the Community Behind, Samuel Bowles and Wendy Carlin, in their paper Shrinking Capitalism, who emphasise the role of civil society alongside government and the markets. In my case, I place people at the top as they will ultimately dictate what constitutes sustainability.  I argued in Pandenomics that the Covid-19 pandemic has thrown a harsh spotlight on the competence of both government and business. It remains to be seen how far this will lead people to insist on an enhanced role in the recovery for civil society and local communities.


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