Macroeconomic and Financial Policies for Climate Change Mitigation

Abstract

Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale transition to a low-carbon economy. This paper provides an overview of the rapidly growing literature on the role of macroeconomic and financial policy tools in enabling this transition. The literature provides a menu of policy tools for mitigation. A key conclusion is that fiscal tools are first in line and central, but can and may need to be complemented by financial and monetary policy instruments. Some tools and policies raise unanswered questions about policy tool assignment and mandates, which we describe. The literature is scarce, however, on the most effective policy mix and the role of mitigation tools and goals in the overall policy framework.

Genealogies of Resilience: From Conservation to Disaster Adaptation

“…46 In stark contrast to this early denialist position, and to Kareiva's equally denialist doctrine of the infinite resilience of ecological communities to destruction, an IMF paper released in 2019 reflected on 'a growing agreement between economists and scientists [that] the risk of catastrophic and irreversible disaster is rising, implying potentially infinite costs of unmitigated climate change, including, in the extreme, human extinction'. 47 For decades, the neoliberal political machine has mounted a counterscience campaign that defines the 'post-truth' era, railing against any effective decarbonisation strategy in the name of the 'free market'. Due to the efforts of engineers, large-scale renewable energy systems combining solar photovoltaics, wind turbines, and batteries now yield clean, dispatchable electricity at a lower cost than maintaining existing coal, nuclear, and gas generation assets in operation, even taking into account the perennial subsidies, indemnities, and general immunity from pollution taxes enjoyed by the thermal power sector.…”

Climate change: policies to manage its macroeconomic and financial effects

“…These actions are of the utmost importance and substantial private and public investments should be directed to them. But a massive transformation of the productive apparatus and consumption patterns is required, including through the wide adoption of new technologies, profound adjustments in land use, and changes in consumer behavior induced by radical adjustments in the costs of GHG, and particularly CO2 emissions, complemented by large investments in sustainable infrastructure, construction, R&D and productive capital, among others (Krogstrup and Oman, 2019).…”

“…The complexity of the subject makes a case for also using a much broader set of tools, such as regulations, spending and investment policies and public guarantees. Financial policy tools can play a complementary role to enable the change in the underlying financial asset structure that is needed to transform the productive structure of the economy (Krogstrup and Oman, 2019;Bolton et al, 2020;IMF, 2019;World Bank, 2019).…”

“…Non-transparent and underpriced climate risks imply that investments subject to climate-related risks are effectively subsidized. Therefore, standardizing climate-related risks disclosures and making them mandatory can help support and improve pricing and transparency of these risks (Krogstrup and Oman, 2019). Gathering and disseminating relevant climate-related financial data could also enhance risk assessment in financial regulation and stress tests.…”

“…Due to their specific role, central banks, financial regulators and supervisors are well-placed to monitor the market dynamics of green finance that help mobilize capital for green and low-carbon investments consistent with the Paris Agreement. Furthermore, depending on each particular country's institutional framework, some central banks and regulators can also play a role as catalysts for a sound scaling up of green finance (Krogstrup and Oman, 2019;NGFS, 2018b).…”