Low-Carbon Transition and Macroeconomic Vulnerabilities: A Multidimensional Approach in Tracing Vulnerabilities and Its Application in the Case of Colombia

Abstract

The transition to a low-carbon and climate resilient economy is a process of heavy restructuring of the productive network, during which sunset industries are in decline or even disappear, while sunrise industries emerge and flourish. This process affects all aspects of the economy: the demand and the supply side, the public and the private sector, the financial structure and the informal economy. In this article, we propose a holistic framework that assesses the macroeconomic vulnerability that emerges from a low-carbon transition, especially in developing economies. We consider vulnerability as a multidimensional phenomenon and, thus, pay attention to all fiscal, social, monetary, financial and external dimensions of the economy. We, then apply this framework to the Colombian economy. We use indicative variables of vulnerability, in all its aspects, and a stock-flow consistent growth model in order to monitor their evolution across time. We consider two scenarios related to a reduction of real fossil fuel exports of Colombia and a global rise in interest rates. Results indicate that the more delayed is the global transition, the higher the vulnerability of the Colombian economy. Similarly, global monetary tightening becomes an obstacle in the transition process, as it induces vulnerability stemming from the financial and external side of the economy.

Keywords:

• Colombia
• development trajectories
• low carbon transition
• macroeconomic vulnerabilities
• stock-flow consistent

JEL CLASSIFICATIONS:

• E60
• Q58
• F18

Acknowledgements

We are grateful to the two anonymous referees for their valuable comments. The usual disclaimer applies.

Disclosure Statement

No potential competing interest was reported by the authors.

Notes

1 Several macroeconomic vulnerability indicators have been proposed in the literature though very few are strictly related to climate-adaptation risks (see, e.g., Aikman et al. 2016; Ndirangu et al. 2014).

2 It should be stressed that the reduction of GHG emissions is to some extent endogenous to green financing and will likely fade out as resource depletion and environmental degradation targets are gradually met. The figure provides a simplified view of the overall process.

3 For a further discussion on the issue of quantification and comparability of various indicators see Goodwin et al. (2018, ch.6).

4 At this point, we do not differentiate between different conceptualizations of fiscal policy and their implications to economic activity (e.g., crowding-out vs. crowding-in), as in all cases, the ostensible goal of the policy makers is the same.

5 The exclusion of net green public investment from the fiscal budget (Darvas and Wolff 2021) could reduce fiscal vulnerability. Nonetheless, off-budget items still weigh on public debt.

6 Various alternative fiscal sustainability indicators have been proposed in the relevant literature (Argitis and Nikolaidi 2014; Tonveronachi 2006), though they are not usually part of the assessment tools of credit rating agencies and, thus, they are excluded from the key indicators.

7 They also emphasize the state capacity to combat vested interests. This function is indeed critical in bringing about effective and just transition policies, though its treatment exceeds the scope of this article.

8 The idea of ‘green swan’ came from the concept of ‘black swan’. The black swan concept, developed by Taleb (2007), refers to unexpected and rare events, with wide-ranging impacts, that can be understood only after their occurrence (Bolton et al. 2020). Thus, green swans are events of this type related to climate-change risks. These events are “characterised by deep uncertainty and nonlinearity, their chances of occurrence are not reflected in past data, and the possibility of extreme values cannot be ruled out” (Weitzman [2009, 2011] cited in Bolton et al. [2020]).

9 For an exposition of how European Central Bank green instruments could be used efficiently under such a different conceptualization; see Dafermos et al. (2020).

10 Ramírez and Díaz Rojas (2019) define external vulnerability as the degree of the economy’s exposure to a sudden stop. This definition is inconsistent with the international literature, as well as experience. In the first place, the concept of vulnerability contains additional aspects to the exposure of the systems, therefore, features related to fragility and resilience should be included. Secondly, a sudden stop is just a stage of a more complex process as is the currency or balance of payments crisis.

11 As mentioned in section 2, the low-carbon transition could have a positive impact on the external dimension of vulnerability through the channel of imports for countries that rely on imports of fossil fuels.

12 The estimation is based on data provided by the Observatory of Economic Complexity.

13 The reduction of the investment grade from BBB- to BB+, by the Fitch rating agency, in July 2021, is indicative of how vulnerable the Colombian economy is in its fiscal dimension.

14 For interested readers, the R codes are available from the authors upon request.

15 Note that this depreciation-driven recovery is mechanical given the specification of the model, but it is unlikely to happen, as recognized by Godin et al. (2023), see footnote 12.

Additional information

Funding

This work benefited from the financial support of the French Agency for Development.

Notes on contributors

Alvaro Moreno

Alvaro Moreno is Associate Professor at Universidad Nacional de Colombia. He holds a MA in “Economics” from ILADES/Georgetown University.

Diego Guevara

Diego Guevara is Associate Professor at Universidad Nacional de Colombia. He is also a Deputy Minister of Finance at the Ministry of Finance and Public Credit in Colombia. He holds a PhD in economics from the Universidad Nacional de Colombia.

Jhan Andrade

Jhan Andrade is an economist of the Universidad Nacional de Colombia. He is currently a master student in economic analysis and policy at Sorbonne Université.

Christos Pierros

Christos Pierros is a researcher at the Labor Institute of the General Confederation of Greek Workers INE GSEE and a Post-Doc researcher at the Panteion University of Social and Political Sciences, Greece. He holds a PhD in Economics from the National and Kapodistrian University of Athens.

Antoine Godin

Antoine Godin is a senior economist at the French Agency for Development (AFD) and associate researcher at the Centre d’Economie et de Gestion de l’Université Paris Nord (CEPN). He holds a PhD in Economics from the University of Pavia, Italy.

Sakir Devrim Yilmaz

Sakir Devrim Yilmaz is a senior economist at Agence Française de Développement, where he works in the GEMMES Macro-modeling unit. He is also a research affiliate at Istanbul Kadir Has University. He holds a PhD from University of Manchester, UK.

Sebastian Valdecantos

Sebastian Valdecantos is an Associate Professor at Aalborg University. He holds a Ph.D. in Economics from the Université Sorbonne Paris Nord.