Climate change: possible macroeconomic implications

Climate change – and the response of governments at home and abroad to it – will affect the macroeconomy in a number of ways, both over shorter horizons and the longer term. Since it influences key economic variables such as output and inflation, climate could change matter for monetary policy makers such as the Monetary Policy Committee (MPC). Monetary policy clearly cannot solve climate change, but climate change may have macroeconomic implications that could be relevant for monetary policy makers. This article explores the macroeconomic effects of physical impacts from climate change (such as extreme weather) and the transition to a net-zero economy (such as through less carbon intensive investment), with a particular focus on the UK economy. It considers what the longer-term changes associated with climate change might mean for the macroeconomic landscape within which monetary policy operates. It also provides an initial assessment of some possible monetary policy considerations. Many of the questions in this area are new, open and worthy of further research. That reflects new analytical challenges associated with climate change, including related to macroeconomic modelling and data quality and availability. In addition, there are many dimensions of uncertainty, not least in relation to how the physical effects of climate change and governments’ policy responses to it evolve over the coming years and decades.