The Unassuming Economist

From a new paper by Enno Schröder and Servaas Storm:

“The unmistakably alarmist tone of the ‘Hothouse Earth’ article stands in contrast to more upbeat reports that there has been a delinking between economic growth and carbon emissions in recent times, at least in the world’s richest countries and possibly even more globally. The view that decoupling is not only possible, but already happening in real time, is a popular position in global and national policy discourses on COP21. To illustrate, in a widely read Science article titled ‘The irreversible momentum of clean energy’, erstwhile U.S. President Barack Obama (2017), argues that the U.S. economy could continue growing without increasing CO2 emissions thanks to the rollout of renewable energy technologies. Drawing on evidence from the report of his Council of Economic Advisers (2017), Obama claims that during the course of his presidency the American economy grew by more than 10% despite a 9.5% fall in CO2 emissions from the energy sector. “…this “decoupling” of energy sector emissions and economic growth,’ writes Obama with his usual eloquence, “should put to rest the argument that combating climate change requires accepting lower growth or a lower standard of living.

(…) And International Monetary Fund economists Cohen, Tovar Jalles, Loungani and Marto (2018), using trend/cycle decomposition techniques, find some evidence of decoupling for the period 1990-2014, particularly in European countries and especially when emissions measures are production-based. The essence of the decoupling thesis is captured well by the title of the OECD (2017) report ‘Investing in Climate, Investing in Growth’. The OECD report, prepared in the context of the German G20 Presidency, argues that the G20 countries can achieve ‘strong’ and ‘inclusive’ economic growth at the same time as reorienting their economies towards development pathways featuring substantially lower GHG emissions.”

 

From the IMF’s latest report on Belize:

“Belize is exceptionally vulnerable to natural disasters and climate change. It already faces hurricanes, flooding, sea level rise, coastal erosion, coral bleaching, and droughts, with impacts likely to intensify given expected increases in weather volatility and sea temperature. Hence, planning for resilience-building, and engagement with development partners on environmental reforms, have been central to Belizean policy-making for many years, since well before Belize submitted its Nationally Determined Contribution (NDC) to the Paris Accord in 2015.

This Climate Change Policy Assessment (CCPA) takes stock of Belize’s plans to manage its climate response, from the perspective of their macroeconomic and fiscal implications. The CCPA is a joint initiative by the IMF and World Bank to assist small states to understand and manage the expected economic impact of climate change, while safeguarding long-run fiscal and external sustainability. It explores the possible impact of climate change and natural disasters on the macroeconomy and the cost of Belize’s planned response. It suggests macroeconomically relevant reforms that could strengthen the likelihood of success of the national strategy and identifies policy gaps and resource needs.

• General preparedness for climate change. Belize’s planned climate response is well articulated. Its NDC includes a clear strategy with relatively well-developed costing for its mitigation and adaptation activities. But while climate planning is advanced and consistent with the broader development strategy (GSDS), implementation capacity remains a challenge. Belize has strong physical emergency planning but receives comparatively little disaster aid and falls short on longer-term financial provisioning.

 

• Mitigation. Belize plans to meet its NDC mitigation goals by expanding its already relatively high share of renewable energy further (from 57 percent to 85 percent of electricity supply), reducing energy intensity and fossil fuel use in transport, and protecting forest reserves and improving sustainable forest management. Given its already-reduced dependence on fossil fuels, and its need to preserve competitiveness with Caribbean neighbors, it has limited scope to raise carbon taxes unilaterally; however, feebates could improve the mitigation incentives in the tax system.

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From a speech by Benoît Cœuré, Member of the Executive Board of the European Central Bank:

“2018 has seen one of the hottest summers in Europe since weather records began.^[1]Increasing weather extremes, rising sea levels and Arctic melting are now clearly visible consequences of human-induced warming.^[2] Climate change is not a theory. It is a fact.

While only one dimension of the human cost, the consequences in macroeconomic terms look set to be large. Without further mitigation, cumulative emissions pose significant risks of economic disruption.^[3]

While there is a wide recognition that environmental externalities should be primarily corrected by first-best policies, such as taxes^[4], all authorities, including the ECB, need to reflect on, and consider, the appropriate response to climate change.

In recent years, central bankers, led by Bank of England Governor Mark Carney, have started discussing the financial stability implications of climate change.^[5] The first tangible results are trickling in. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures published its first status report just a few weeks ago. Only last week, ECB Banking Supervision communicated to banks that climate-related risks have been identified as being among the key risk drivers affecting the euro area banking system.

And, of course, the Central Banks and Supervisors Network for Greening the Financial System published its first progress report just a few weeks ago, reasserting that climate-related risks fall squarely within the supervisory and financial stability mandates of central banks and supervisors.

An area that has received less attention though, both in policy and in academia, is the impact of climate change on the conduct of monetary policy. Today I would like to contribute to this debate and offer a way of thinking about how climate change fits into our current monetary policy framework – the way we react to shocks and the way we think policy propagates through the economy – and how it may affect our monetary policy implementation.

I will argue that climate change can be expected to affect monetary policy one way or the other. That is, if left unchecked, it may further complicate the correct identification of shocks relevant for the medium-term inflation outlook, it may increase the likelihood of extreme events and hence erode central banks’ conventional policy space more often, and it may raise the number of occasions on which central banks face a trade-off forcing them to prioritise stable prices over output.

In the more desirable scenario in which humankind rises to the climate change challenge, the implications for monetary policy could be equally far-reaching, in particular if the associated shift in the energy mix changes relative prices to an extent that risks destabilising medium-term inflation expectations.

I will also argue that there is scope for central banks themselves to play a supporting role in mitigating the risks associated with climate change while staying within our mandate.”

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From a new working paper by Frederick van der Ploeg and Armon Rezai:

“A simple integrated assessment framework that gives rules for the optimal carbon price, transition to the carbon-free era and stranded carbon assets is presented, which highlights the
ethical, economic, geophysical and political drivers of optimal climate policy. For the ethics we discuss the role of intergenerational inequality aversion and the discount rate, where we show the importance of lower discount rates for appraisal of longer run benefit and of policy makers using lower discount rates than private agents. The economics depends on the costs and rates of technical progress in production of fossil fuel, its substitute renewable energies and sequestration. The geophysics depends on the permanent and transient components of
atmospheric carbon and the relatively fast temperature response, and we allow for positive feedbacks. The politics stems from international free-rider problems in absence of a global
climate deal. We show how results change if different assumptions are made about each of the drivers of climate policy. Our main objective is to offer an easy back-on-the-envelope analysis, which can be used for teaching and communication with policy makers.”

From the latest issue of the Journal of Economic Perspectives by Solomon Hsiang and Robert E. Kopp:

“Humans have engaged in large-scale transformation of natural systems for millennia. Stone Age hunting technologies led to extinctions of large mammals; agricultural revolutions transformed forests into farmlands; pursuit of minerals has carved the earth’s surface; dams and reservoirs now manipulate the flow of almost all rivers; and synthetic fertilizers now flood the nitrogen cycle. But among these transformations, the restructuring of the global carbon cycle and the accompanying alteration of the climate stands apart in its sheer scale, complexity, and economic significance. Essentially all humans that have ever lived contributed, in their own small ways, to reshaping this planetary-scale system. Thousands of years of forest clearance may have added hundreds of billions of tons of carbon to the atmosphere. In the industrial era, every home lit by a coal or natural gas-fired power plant and every petroleum-powered train, plane, and motor vehicle has contributed to the net accumulation of carbon dioxide in the atmosphere. The average human contributes about 5 tonnes of carbon dioxide (CO2) every year (Le Quéré et al. 2018), about a quarter of which will remain in the atmosphere for well over a millennium (Archer et al. 2009).

(…)

The goal of this article is to provide a brief introduction to the physical science of climate change, aimed towards economists. We begin by describing the physics that controls global climate, how scientists measure and model the climate system, and the magnitude of human-caused emissions of carbon dioxide. We then summarize many of the climatic changes of interest to economists that have been documented and that are projected in the future. We conclude by highlighting some key areas in which economists are in a unique position to help
climate science advance. An important message from this final section, which we believe is deeply underappreciated among economists and thus highlight here, is that all climate change forecasts rely heavily and directly on economic forecasts for the world. On timescales of a half-century or longer, the largest source of uncertainty in climate science is not physics, but economics (Hawkins and Sutton 2009).”