The climate and the economy

The European Central Bank (ECB) published a discussion paper in its „Working Paper Series: The climate and the economy“, examining the economic implications of climate change and the public policies being implemented to address it.
The paper identifies key medium- and long-term effects on growth, innovation, inflation, financial markets, fiscal policy, and socio-economic outcomes.
The authors argue that climate change will cause income divergence, energy market adjustments, increased inflation variability, financial market stress, intensified innovation, increased migration, and rising public debt.
These challenges can be managed by EU member states, especially with an early and orderly transition scenario, but the direction, scope, and speed of economic transformation are subject to uncertainty due to the range of climate scenarios and policy paths.
The paper emphasizes the need for a large-scale, coordinated response to transition towards a net-zero economy, involving fiscal authorities, central banks, regulators, and supervisors.
The ECB’s optimal monetary policy response is one of inflation forecast targeting, but the challenge exceeds the competencies and policy tools of the central bank.