Climate Change and Financial Policy: A Literature Review

This article reviews the rapidly proliferating economic literature on climate change and financial policy. We find: (1) modeling objectives shifting toward target-based approaches, scenarios analysis, and institutional systems-dynamics models as a way to make progress despite ethical concerns around discount rates and irreducible uncertainty in climate physicseconomic behavior dynamics; (2) emerging evidence of financial markets pricing in climate-related risks but little evidence that climate risks are priced inadequately; and (3) a range of significant institutional distortions preventing climate-efficient pricing that models are now beginning to capture to better align financial market outcomes with climate change. We identify some particularly promising areas of future work, including better evaluation of losses-givendefaults under permanent climate shocks and additional integration of financial system frictions into the rapidly growing literature on climate and financial stability.