Can we Mitigate Climate Change through Financial Regulation?

2026-07-22

Climate change is one of the most pressing problems of humanity. And yet the carbon emissions have not decreased but increased since 2006. The present project presents a novel approach to achieve a global reduction of carbon emissions in the coming decades by harnessing the power of financial regulation. We will concentrate on the challenges to make this approach work, as well as on the opportunities it presents, to achieve a practical solution for this extremely difficult problem. We argue that financial stability regulation is sufficiently powerful to change the incentives for firms and reduce significantly their carbon footprints. The substance of the argument starts from the observation that financial systems are increasingly interconnected. This increasing interconnection has led regulators to give a larger role to a macroprudential approach in their activities. That is, they intend to reduce risks to the whole financial system, what they call “systemic risks,” rather than simply risks to individual institutions. Our work stems from a large emerging literature about contagion in financial networks, and will explore its implications for climate change mitigation and financial regulation. The substance of this project is to answer a series of questions about the viability and desirability of this policy. It will be structured around three work packages. WP1, will analyse the expected distribution of shocks that arises from climate change. It will also study their impact to the financial system. The other two works packages will explore two key determinants of adoption of the policy. In WP2 we explore the impact of the large uncertainty about the effects of climate change on the mindset of regulators. In WP3 we study the transmission of social attitudes and social norms into the decision processes of legislators and regulators.

Spain

2026-02-15