Climate change and monetary policy

Abstract

Although the issue of climate change is shrouded in a great deal of uncertainty, there is broad agreement over certain key questions: the global climate is heating up and something has to be done to moderate this trend. This article considers what effects climate change and climate policy could have on monetary policy. The focus is on two possible channels of influence. In the first place, macroeconomic developments as a whole could become unstable and monetary policymaking could as a result become more challenging. Secondly, if we are going to be able to moderate climate warming, the relative prices of commodities will have to change: greenhouse gas emissions, fossil fuels and energy will have to become more expensive relative to other commodities and production inputs. From a central bank perspective, the key issue is how this change in relative prices can occur without an increase in the general level of prices, ie higher inflation.