Climate-Change-Driven Inflation, Modern Money Theory, and Degrowth

Despite its growing price impacts, climate change has been a relatively overlooked contributor to recent inflationary trends. While global inflationary pressures have been easing since 2023, the global economy remains increasingly more vulnerable to climate-change-driven inflation. This concern has been recently voiced by the European Central Bank, the Bank of England, the Central Bank of Ireland, and the Bank of Canada, among others. Given the supply-side nature of climate-change-driven inflation, the traditional tools of monetary policy, such as higher interest rates, will prove ineffective at controlling it. Fiscal policy measures, such as public-sector-driven productive capacity expansion, as proposed in the Modern Money Theory (MMT) literature, may prove unfeasible from an ecological economics perspective. In the age of rapidly accelerating climate change, a transition to a global degrowth-based economic system may prove the only viable approach to mitigating climate change and the risks of climate-change-driven inflation. While MMT has been commonly associated with growth-oriented public policies and public sector-supported productive capacity expansion, MMT could be effectively utilized as a policy toolkit for a degrowth transition instead, as has been suggested in the degrowth literature