Advertisement

Climate Change: Macroeconomic Impact and Implications for Monetary Policy

  • Sandra BattenEmail author
  • Rhiannon Sowerbutts
  • Misa Tanaka
Chapter
  • 29 Downloads
Part of the Palgrave Studies in Sustainable Business In Association with Future Earth book series (PSSBAFE)

Abstract

Climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary stability objective. Climate change can affect the macroeconomy both through gradual warming and the associated climate changes (e.g. total seasonal rainfall and sea level increases) and through increased frequency, severity and correlation of extreme weather events (physical risks). Inflationary pressures might arise from a decline in the national and international supply of commodities or from productivity shocks caused by weather-related events such as droughts, floods, storms and sea level rises. These events can potentially result in large financial losses, lower wealth and lower GDP. An abrupt tightening of carbon emission policies could also lead to a negative macroeconomic supply shock (transition risks). This chapter reviews the channels through which climate risks can affect central banks’ monetary policy objectives, and possible policy responses. Approaches to incorporate climate change in central bank modelling are also discussed.

References

  1. Acevedo, S., Mrkaic, M., Novta, N., Pugacheva, E., & Petia, T. (2018). The effects of weather shocks on economic activity: What are the channels of impact? IMF Research Department Working Paper, No. 18/144). Washington, DC: International Monetary Fund.Google Scholar
  2. AMS—American Meteorological Society. (2018). Explaining extreme events in 2017 from a climate perspective. Bulletin of the American Meteorological Society, 99(12), 1359–1376.Google Scholar
  3. Bank of England. (2015). The impact of climate change on the UK insurance sector: A climate change adaptation report by the Prudential Regulation Authority. London: Bank of England.Google Scholar
  4. Bank of England. (2018). The impact of adverse weather. Inflation report, Q1, 12.Google Scholar
  5. Bank of Japan. (2011). Responses to the Great East Japan earthquake by payment and settlement systems and financial institutions in Japan. Payment and Settlement Systems Department.Google Scholar
  6. Batten, S. (2018). Climate change and the macroeconomy: A critical review. Bank of England Staff Working Paper, No. 706. London: Bank of England.Google Scholar
  7. Batten, S., Sowerbutts, R., & Tanaka, M. (2016). Let’s talk about the weather: The impact of climate change on central banks. Bank of England Staff Working Paper, No. 603. London: Bank of England.Google Scholar
  8. Batten, S., Sowerbutts, R., & Tanaka, M. (2018). Climate change: What implications for central banks and financial regulators? In B. Caldecott (Ed.), Stranded assets and the environment. London: Routledge.Google Scholar
  9. Bindoff, N. L., Stott, P. A., Achuta Rao, K. M., Allen, M. R., Gillett, N., Gutzler, D., Hansingo, K., Hegerl, G., Hu, Y., Jain, S., Mokhov, I. I., Overland, J., Perlwitz, J., Sebbari, R., & Zhang, X. (2013). Detection and attribution of climate change: From global to regional. In T. F. Stocker, D. Qin, G.-K. Plattner, M. Tignor, S. K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex, & P. M. Midgley (Eds.), Climate change 2013: The physical science basis. Contribution of Working Group I to the fifth assessment report of the intergovernmental panel on climate change. Cambridge, UK and New York, NY: Cambridge University Press.Google Scholar
  10. Bloesch, J., & Gourio, F. (2015). The effect of winter weather on U.S. economic activity. Economic Perspectives, 39(1), 1–20.Google Scholar
  11. Bloomberg. (2019). Is climate change drying up German rivers – and growth? Retrieved from https://www.bloomberg.com/opinion/articles/2019-01-25/climate-change-is-probably-bringing-down-germany-s-growth.
  12. Boldin, M., & Wright, J. H. (2015). Weather adjusting economic data. Brookings Papers on Economic Activity, 2015(Fall), 227–274.CrossRefGoogle Scholar
  13. Bollen, J., Guay, B., Jamet, S., & Corfee-Morlot, J. (2009). Co-benefits of climate change mitigation policies: Literature review and new results. OECD Economics Department Working Paper, No. 693. Paris: OECD.Google Scholar
  14. Bordo, M. D., Dueker, M. J., & Wheelock, D. C. (2001). Aggregate price shocks and financial stability: The United Kingdom 1796–1999. Federal Reserve Bank of St. Louis Working Paper, No. 2001-018). St. Louis: Federal Reserve Bank of St. Louis.CrossRefGoogle Scholar
  15. Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., & Tanaka, M. (2018). Climate change challenges for central banks and financial regulators. Nature Climate Change, 8(6), 462–468.CrossRefGoogle Scholar
  16. Carney, M. (2015). Breaking the tragedy of the horizon – climate change and financial stability. Speech at Lloyd’s of London, London, 29 September 2015. London.Google Scholar
  17. Carney, M. (2018). Remarks at the accounting for sustainability summit 2018 accounting for sustainability forum, London, 21 November 2018.Google Scholar
  18. Cavallo, E. A., & Noy, I. (2010). The economics of natural disasters: A survey. IDB Working Paper Series, No. 124. Washington, DC: IDB.Google Scholar
  19. Cœuré, B. (2018). Monetary policy and climate change. Speech given at the conference on Scaling up Green Finance: The Role of Central Banks. Berlin, 8 November 2018.Google Scholar
  20. De Bruyn, S. M., Vergeer, R., Shep, E., Hoen, M. T., Korteland, M., Cludius, J., Schumacher, K., Zell-Ziegler, C., & Healy, S. (2015). Ex-post investigation of cost pass-through in the EU ETS. An analysis for six sectors, European Union Commission, November 2015.Google Scholar
  21. Debelle, G. (2019). Climate change and the economy. Speech given at the Public Forum hosted by the Centre for Policy Development. Sydney, 12 March 2019.Google Scholar
  22. Dell, M., Jones, B. F., & Olken, B. A. (2012). Temperature shocks and economic growth: Evidence from the last half century. American Economic Journal: Macroeconomics, 4(3), 66–95.Google Scholar
  23. Dell, M., Jones, B. F., & Olken, B. A. (2014). What do we learn from the weather? The new climate–economy literature. Journal of Economic Literature, 52(3), 740–798.CrossRefGoogle Scholar
  24. Deryugina, T., & Hsiang, S. M. (2014). Does the environment still matter? Daily temperature and income in the United States. NBER Working Paper No. 20750. Cambridge, MA: National Bureau of Economic Research.CrossRefGoogle Scholar
  25. El Hadri, H., Mirza, D., & Rabaud, I. (2017). Natural disasters and countries’ exports: New insights from a new (and an old) database. Document de Recherche du Laboratoire d’Économie d’Orléans, No. 2017-10.Google Scholar
  26. ESRB—European Systemic Risk Board. (2016). Too late, too sudden: Transition to a low-carbon economy and systemic risk. Report of the Advisory Scientific Committee No. 6. Frankfurt am Main: European Systemic Risk Board.Google Scholar
  27. Fabra, N., & Reguant, M. (2014). Pass-through of emission costs in electricity markets. American Economic Review, 104(9), 2872–2899.CrossRefGoogle Scholar
  28. Fankhauser, S., & Tol, R. S. J. (2005). On climate change and economic growth. Resource and Energy Economics, 27, 1–17.CrossRefGoogle Scholar
  29. Felbermayr, G., & Gröschl, J. (2013). Natural disasters and the effect of trade on income: A new panel IV approach. European Economic Review, 58(1), 18–30.CrossRefGoogle Scholar
  30. Fuss, S., Canadell, J. G., Peters, G. P., Tavoni, M., Andrew, R. M., Ciais, P., Jackson, R. B., Jones, C. D., Kraxner, F., Nakicenovic, N., & Le Quéré, C. (2014). Betting on negative emissions. Nature Climate Change, 4(10), 850–853.CrossRefGoogle Scholar
  31. Gassebner, M., Keck, A., & Teh, R. (2010). Shaken, not stirred: The impact of disasters on international trade. Review of International Economics, 18(2), 351–368.CrossRefGoogle Scholar
  32. Gatti, D., & Desiderio, S. (2015). Monetary policy experiments in an agent-based model with financial frictions. Journal of Economic Interaction and Coordination, 10(2), 265–286.CrossRefGoogle Scholar
  33. Gourio, F. (2015). The effect of weather on first-quarter GDP. Chicago Fed Letter, No. 341.Google Scholar
  34. Groosman, B., Muller, N. Z., & O’Neill-Toy, E. (2011). The ancillary benefits from climate policy in the United States. Environmental and Resource Economics, 50(4), 585–603.CrossRefGoogle Scholar
  35. Gualdi, S., Tarzia, M., Zamponi, F., & Bouchaud, J. P. (2015). Tipping points in macroeconomic agent-based models. Journal of Economic Dynamics and Control, 50, 2961.CrossRefGoogle Scholar
  36. Heinen, A., Khadan, J., & Strobl, E. (2016). The inflationary costs of extreme weather in developing countries. Mimeo.Google Scholar
  37. Hintermann, B. (2016). Pass-through of CO2 emission costs to hourly electricity prices in Germany. Journal of the Association of Environmental and Resource Economists, 3(4), 857–891.CrossRefGoogle Scholar
  38. Houser, T., Hsiang, S., Kopp, R., & Larsen, K. (2015). Economic risks of climate change: An American Prospectus. New York: Columbia University Press.CrossRefGoogle Scholar
  39. Hsiang, S. M., & Jina, A. S. (2014). The causal effect of environmental catastrophe on long-run economic growth: evidence from 6,700 cyclones. NBER Working Paper No. 20352. Cambridge, MA: National Bureau of Economic Research.Google Scholar
  40. IEA—International Energy Agency. (2013). Technology road map: Biofuels for transport. Paris.Google Scholar
  41. IPCC—Intergovernmental Panel on Climate Change. (2018). Global Warming of 1.5°C. An IPCC Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts to eradicate poverty. In Masson-Delmotte, V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, Maycock, M. Tignor, and T. Waterfield (eds.). World meteorological organization, Geneva, Switzerland.Google Scholar
  42. Kaya, Y. (1990). Impact of carbon dioxide emission control on GNP growth: Interpretation of proposed scenarios. Paper presented to the IPCC Energy and Industry Subgroup, Response Strategies Working Group. Paris.Google Scholar
  43. Keen, B. D., & Pakko, M. R. (2010). Monetary policy and natural disasters in a DSGE model. Federal Reserve Bank of St. Louis Research Division Working Paper, no. 2007-025D. St. Louis: Federal Reserve Bank of St. Louis.Google Scholar
  44. Keen, B. D., & Pakko, M. R. (2011). Monetary policy and natural disasters in a DSGE model. Southern Economic Journal, 77(4), 973–990.Google Scholar
  45. Lane, T. (2017). Thermometer rising – Climate change and Canada’s economic future. Remarks for the Finance and Sustainability Initiative. Montréal, 2 March 2017.Google Scholar
  46. Lane, P. R. (2019). Climate change and the Irish financial system. Economic Letters, 01/EL/19.Google Scholar
  47. Lesk, C., Rowhani, P., & Ramankutty, N. (2016). Influence of extreme weather disasters on global crop production. Nature, 529, 84–87.CrossRefGoogle Scholar
  48. Lise, W., Sijm, J., & Hobbs, B. F. (2010). The impact of the EU ETS on prices, profits and emissions in the power sector: Simulation results with the COMPETES EU20 model. Environmental and Resource Economics, 47, 23–44.CrossRefGoogle Scholar
  49. McKibbin, W. J., Morris, A., Wilcoxen, P. J., & Panton, S. J. (2017). Climate change and monetary policy: Dealing with disruption. Brookings Climate and Energy Discussion Paper.Google Scholar
  50. Mersch, Y. (2018). Climate change and central banking. Speech at the Workshop discussion Sustainability is becoming mainstream. Frankfurt am Main, 27 November 2018.Google Scholar
  51. NGFS—Network for Greening the Financial System. (2019). A call for action: Climate change as a source of financial risk. Retrieved from https://www.banque-france.fr/en/financial-stability/international-role/network-greening-financial-system.
  52. OECD—Organisation for Economic Co-operation and Development. (2015). The economic consequences of climate change. Paris: OECD Publishing.Google Scholar
  53. Oh, C., & Reuveny, R. (2010). Climatic natural disasters, political risk, and international trade. Global Environmental Change, 20(2), 243–254.CrossRefGoogle Scholar
  54. Parker, M. (2018). The impact of disasters on inflation. Economics of Disasters and Climate Change, 2(1), 21–48.CrossRefGoogle Scholar
  55. Patt, A., & Siebenhüner, B. (2005). Agent based modeling and adaptation to climate change. Vierteljahrshefte zur Wirtschaftsforschung, 74(2), 310–320.CrossRefGoogle Scholar
  56. Peersman, G. (2018). International food commodity prices and missing (dis)inflation in the euro area. CESifo Working Paper, No. 7338. Munich: CESifo.Google Scholar
  57. Pindyck, R. S. (2013). Climate change policy: What do the models tell us? Journal of Economic Literature, 51(3), 860–872.CrossRefGoogle Scholar
  58. Rai, V., & Henry, A. D. (2016). Agent-based modelling of consumer energy choices. Nature Climate Change, 6, 556–562.CrossRefGoogle Scholar
  59. Rudebusch, G. D. (2019). Climate change and the Federal Reserve. FRBSF Economic Letters, No. 2019-09.Google Scholar
  60. Scott, M., van Huizen, J., & Jung, C. (2017). The Bank of England’s response to climate change. Bank of England Quarterly Bulletin, Q2, 98–109.Google Scholar
  61. Smulders, S., Toman, M., & Withagen, C. (2014). Growth theory and ‘green growth. Oxford Review of Economic Policy, 30(3), 423–446.CrossRefGoogle Scholar
  62. Stern, N. (2013). The structure of economic modeling of the potential impacts of climate change: Grafting gross underestimation of risk onto already narrow science models. Journal of Economic Literature, 51(3), 838–859.CrossRefGoogle Scholar
  63. Stott, P. A. (2016). How climate change affects extreme weather events. Science, 352(6293), 1517–1518.CrossRefGoogle Scholar
  64. Stott, P. A., Christidis, N., Otto, F. E. L., Sun, Y., Vanderlinden, J. P., van Oldenborgh, G. J., Vautard, R., von Storch, H., Walton, P., Yiou, P., & Zwiers, F. W. (2016). Attribution of extreme weather and climate-related events. WIREs Climate Change, 7, 23–41.CrossRefGoogle Scholar
  65. TCFD—Task Force for Climate-Related Financial Disclosure. (2018). 2018 Status report.Google Scholar
  66. Thober, J., Schwarz, N., & Hermans, K. (2018). Agent-based modeling of environment-migration linkages: A review. Ecology and Society, 23(2), 41.CrossRefGoogle Scholar
  67. Turrell, A. (2016). Agent-based models: Understanding the economy from the bottom up. Bank of England Quarterly Bulletin Series, Q4, 173–188.Google Scholar
  68. US (United States) Senate. (2019). Letter to the Honorable Jerome H. Powell, Chairman of the Board of Governors, Federal Reserve System, 25 January. Retrieved from https://www.schatz.senate.gov/imo/media/doc/Letter%20to%20Federal%20Reserve,%20OCC,%20FDIC%20re%20Climate%20Change.pdf?mod=article_inline.
  69. Van Vuuren, D. P., Edmonds, J., Kainuma, M., Riahi, K., Thomson, A., Hibbard, K., Hurtt, G. C., Kram, T., Krey, V., Lamarque, J. F., & Masui, T. (2011). The representative concentration pathways: An overview. Climatic Change, 109, 5–31.CrossRefGoogle Scholar
  70. Zhang, X., Wan, H., Zwiers, F. W., Hegerl, G. C., & Min, S.-K. (2013). Attributing intensification of precipitation extremes to human influence. Geophysical Research Letters, 40, 5252–5257.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2020

Authors and Affiliations

  • Sandra Batten
    • 1
    Email author
  • Rhiannon Sowerbutts
    • 1
  • Misa Tanaka
    • 1
  1. 1.Bank of EnglandLondonUK

Personalised recommendations