What are the consequences of climate change and measures connected to climate change for macroeconomics and monetary policy in general? On May 13, the Applied Macroeconomics and Econometrics Center (AMEC) of the New York Federal Reserve hosted a symposium titled “Climate Change: Implications for Macroeconomics.” This was the central topic of discussion. This page includes a quick summary of the discussion’s content and links to recordings of the individual sessions and the slides presented by the participants.
It is a Symposium
The purpose of the symposium was to have an open and vigorous discussion on the consequences of climate change on macroeconomic policy. In four sessions, a group of academics and policymakers discussed and debated the following topics: (1) the implications of climate change for monetary policy; (2) understanding the macroeconomic impacts (including distributional implications) of the reallocation of labour and capital across sectors and geographies that may result from climate change and climate policies; (3) examining the impact of climate policy on the global supply chain and the corresponding implications for monetary policy; and (4) understanding the financial market impact of uncertainty associated with climate change.
Implications for Monetary Policy of Climate Change
The subject of the first session was macroeconomics. James Stock from Harvard University explored the monetary policy implications of climate change (slides). The essence of his talk was that climate change and actions aimed to combat it will be a significant source of macroeconomic management risks. Some of these risks result from physical disruptions caused by climate-related phenomena such as hurricanes or heat waves, but the majority result from the effects of so-called transition policies — that is, measures intended to address climate change, such as a carbon tax. Then, Professor Stock offered empirical evidence on some of these dangers by analysing the impact of carbon taxes, climate policy uncertainty, and energy prices on actual economic activity and inflation.
MIT’s Iván Werning expounded on the macroeconomic implications of transition risks (slides). Werning first discussed the effects of energy price shocks, such as those the U.S. economy is currently experiencing, in any economy where real wages do not adjust quickly, as in the work of Blanchard and Gal, and emphasised that in such an economy, these shocks have inflationary effects similar to cost-push shocks. He next discussed monetary policy in times of structural reallocation, drawing on his work with Guerrieri, Lorenzoni, and Straub, and suggested that monetary policy may want to permit modest inflation to help the adjustment in real wages and reallocation across sectors.
Allocation of Resources and Climate Change
Our second session centred on the effects of climate on the reallocation of labour and capital. Our first speaker, Daron Acemoglu of MIT, emphasised the need for advances in energy efficiency, but also stressed that the shift may be more or less challenging depending on the “job” (slides). For instance, there have been significant developments in renewable energy, particularly solar and wind. He emphasised that the price of alternatives is a factor in the success of renewable energy: when alternative energy sources were expensive, investment in green technologies grew, and vice versa. This means that any efforts to reduce the price of gasoline will impede the development of green energy technologies. Regarding the impact on labour, Acemoglu stated that while a complete transition to clean energy may be highly expensive, many manufacturing enterprises have already made the change, and just 40,000 people are employed in coal. In conclusion, Acemoglu stated that with ordinary discounting, welfare estimates based on utility maximisation would imply that any climatic harm in a hundred years would not matter at all, and he advocated for a new technique of evaluating the need for macroeconomic action.
Tatyana Deryugina from the University of Illinois at Urbana-Champaign was our next speaker. Professor Deryugina described the impacts of climate change on labour distribution in space (slides). First, she mentioned that there is a great deal of potential for labour mobility in the U.S.; about 40 percent of people live in regions other than where they were born. To the degree that climate will alter the spatial distribution of productivity, these changes may be exploited through labour mobility. Professor Deryugina mentioned her research on Hurricane Katrina, which indicated that those who were forced to relocate because of the storm earned more after leaving New Orleans than those who remained. She said that this raises the question of why they stayed in the first place. Lastly, she emphasised that understanding why this suboptimal mobility exists (lack of information or social networks, for instance) is essential for developing policies that promote mobility.
Climate Change, Global Trade, and Production
The third session focused on the worldwide consequences of climate change. Speakers in the event discussed the effects of climate change on economic activity within, across, and between nations, as well as their consequences for economic growth. Using historical data, the first speaker, Solomon Hsiang of the University of California, Berkeley, demonstrated how temperature fluctuations have affected economic growth across countries (slides). While the increases in temperature have been slow, Hsiang demonstrated that little adjustments will have profound effects on the world. He subsequently shifted his focus to the difficulty of establishing precise distributions of potential climate events.
The second speaker, Esteban Rossi-Hansberg from the University of Chicago, spoke about the significance of climate change adaptation (slides). His lecture centred on the disparate effects of climate change on different regions, implying winners and losers. His quantitative modelling emphasised the necessity of spatially reallocating economic activity and the accompanying costs and benefits. Rossi-Hansberg argued for the necessity for more comprehensive macroeconomic models of climate change with general equilibrium in order to more precisely assess the effects and actions related with climate change.
Climate Uncertainty and the Economy
The fourth and final session centred on climate change and financial market instability. The University of Chicago’s Lars Peter Hansen explored the policy issues created by climate change uncertainty (slides). He suggested that historical measurements based on previous climate change are of little use and that actions unsupported by credible quantitative modelling could be detrimental to the reputations of central banks. Since it provides for a broad view on uncertainty and includes formulations that are dynamic and recursive, he argued that decision theory under uncertainty gives some useful concepts for discussing and classifying our conversations. As an illustration of ambiguity, Professor Hansen cited divergent climate model forecasts. Taking into account 144 models, he noted significant divergence across the models and claimed that it is unclear how to weight these numerous models to obtain a probability distribution of the effect. Concerning the greening of portfolios, he noted that while there is research demonstrating the benefits of green policy, there is also research demonstrating the benefits of doing the opposite.
Monika Piazzesi emphasised the importance of financial markets in the transition to net zero, which refers to a situation where equal amounts of carbon dioxide are absorbed and released into the atmosphere. She opened her presentation by highlighting the significant shift in asset acquisitions resulting from the increase in the proportion of ESG (environmental, social, and governance) investments. She emphasised that the European Central Bank’s portfolio differs significantly from the European market’s portfolio. Typically, the ECB purchases bonds from manufacturing sectors with higher emissions, skewing its bond purchases toward more polluting industries. Additionally, the ECB portfolio has a smaller proportion of services than the European market portfolio, despite the fact that the services sector has low carbon emissions. In the framework of a growth model with climatic externalities and financial frictions, she claimed that central bank purchases cannot be market-neutral, suggesting that there will be an influence on capital allocation and the market price of risk when central banks interfere. Thus, it is essential to comprehend whether central bank acquisitions are green or brown.
In conclusion, the symposium examined some of the ways in which climate change has significant consequences for macroeconomics and monetary policy, and concluded that policymakers should therefore consider climate change when formulating policy for the coming decades.
