Central bankers need to be prepared for the economic impact of climate change as it is likely to boost inflation, Bank of England (BoE) policymaker Catherine Mann said in a speech earlier this month.
Climate change is becoming “a concern for monetary policymakers, directly within a price stability mandate”, and could change how policies flow through the economy, she said at the Environmental Economics Seminar on 13 November.
“The research here points to increased inflation, increased inflation persistence, and increased inflation volatility associated with climate shocks, policies and spillovers,” she said.
Pointing to research on the effects of carbon prices or carbon taxes, Mann noted that inflation volatility is more elevated, while the redistribution of carbon tax revenues or emission-certificate auctions and how subsidies are funded will have a macroeconomic effect. Nor would the impact be the same as an oil price shock, as it would be more long-lasing and have a wider effect. As such, these policies should be of interest to central bankers, especially as they are more likely to have an impact on inflation in the short term, she said.
The remit of her position at the central bank requires her to respond to the effects of climate change, she added.
While central banks “cannot solve climate change” they “do have a part to play”, Mann said. If governments don’t put climate policies in place, then central banks might not be concerned about transition risks, but on physical impacts to the economy. But more research on the impact of climate change on the macroeconomy is needed, she noted. The BoE cut its spending on climate research amid budget cuts earlier this year.
“Either way, monetary policy decisions will be affected through multiple channels by climate change strategies or lack thereof. Therefore, central banks should raise awareness of climate issues along with continuing efforts to understand how those risks translate into policy challenges,” she said.
The BoE was one of the first central banks to warn about the threats of climate change on the economy and its mandate was updated in 2021 to bring it in line with the UK government’s net-zero carbon strategy. The UK received a C rating on the Green Central Banking scorecard.
This page was last updated November 28, 2023
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