Lessons from Monetary History for Tackling Climate Change

This report from the Sustainable Finance Lab shows that the effects of runaway climate change are comparable to those of wars and other significant disasters. It reviews over 350 years of central banking history to examine how the banks responded to such events and thus identify lessons for how they might help combat climate change today.

Following an overview of the nature and origins of central banks, the report examines their response to wars, natural disasters and epidemics along with their role in re-establishing price, financial and economic stability.

The core proposition is that the economic damage of climate change can be an order of magnitude greater than the most disruptive and damaging wars – events often associated with high inflation and even hyperinflation. However, monetary support for responses to the world wars and other crises did not lead to excessively high inflation.

The lessons from the report are stark. Climate change is a significant and growing threat to price stability, and mitigating that threat is a manageable development challenge, although by the time it becomes politically feasible it may be too late. However central banks are well positioned to quickly catalyse climate action and should formulate a common long-term strategy to do so.

This innovative study was well received, including by Klaas Knot, president of the Dutch central bank and member of the governing council of the European Central Bank (ECB).

“As this report shows, periods of severe economic instability caused by climate change can carry serious risks to financial and price stability. For that reason, in the medium to long term, a stable climate can be seen as an important precondition for central banks to be able to deliver on their mandate,” said Klaas Knot.

The report title is a reference to ECB president Christine Lagarde’s stated intention to “explore every avenue available in order to combat climate change”.