Climate change, political measures to reduce greenhouse gas emissions and the transition to a carbon-neutral economy have a significant economic impact. In addition to a dampening effect on aggregate demand and supply, the internalisation of negative externalities will likely increase production costs and – in the case of a pass-through to consumers – ultimately the inflation rate. To the extent that this affects the (SEACEN member) central bank’s objectives of price and financial stability, climate-fuelled economic developments might impact monetary policy – with several central banks resorting to a Green Monetary Policy.
This paper identifies its common elements and argues that event though fiscal policies are first best, monetary policy adapts where climate risks impair price and/or financial stability over the policy horizon. Monetary policy has a subsidiary role that operates through its mandate; where climate risks affect inflation and transmission, instruments may be adapted without replacing fiscal policy. The greatest contribution SEACEN member central banks can make to the green transformation however is to ensure price stability.