Commentary: Macroeconomics and Climate Change

Main Points

• Higher temperatures and more extreme weather events are likely to lead to lower, and more volatile, output. These results provide a strong incentive for governments to move as quickly as possible to net zero.
• Over the medium to longer run, a large increase in investment in new green technologies could lead to higher output and possibly, depending on the degree of spillover from this investment to productivity in other sectors, to higher future output growth.
• The key question for fiscal policymakers is how to finance the required public investment while ensuring that the public finances remain sustainable. One answer is to use the revenue raised via carbon taxes to finance the investment.
• Policymakers at the Bank of England need to consider the implications for financial stability of increased volatility, increased claims on the insurance industry and the possibility of ‘stranded assets’, as well as the effects of climate change and policy on growth and r*.