Against the real-time consequences of extreme weather events, recent advances in climate science and economic analysis, have revealed important lessons about the macroeconomic consequences of climate change.<\/p>\n\n\n\n
\n- Both the contributions to and consequences of climate change are unequally distributed between and within countries.<\/li>\n\n\n\n
- Estimates of the economic costs of climate change and corresponding uncertainty tend to grow rather than fall over time.<\/li>\n\n\n\n
- Well-designed carbon pricing mechanisms can effectively reduce emissions and inequality; poorly designed ones do not.<\/li>\n\n\n\n
- It is exceedingly difficult to draw broad conclusions from the wealth of climate microeconomic studies to make inferences about macroeconomic outcomes.<\/li>\n<\/ul>\n\n\n\n
Lessons that have proved harder to convey include the facts that:<\/p>\n\n\n\n
\n- Climate investments are cheaper than the alternative \u2013 namely, climate-driven disasters.<\/li>\n\n\n\n
- The effects of climate change are severe even in wealthy countries (Kahn et al, 2021<\/a>).<\/li>\n\n\n\n
- The consequences of climate change are landing sooner than early projections predicted.<\/li>\n\n\n\n
- Many of the biggest risks may fall in the realm of social and political instability rather than extreme weather.<\/li>\n\n\n\n
- The financial system is far behind and poorly equipped to measure and manage these risks.<\/li>\n<\/ul>\n\n\n\n
Recent evidence also shows that many low-carbon and climate-resilient investments \u2013 from energy and transport infrastructure to buildings and agriculture \u2013 are cheaper than their fossil fuel-based counterparts. As a result, their introduction would lead to the potential stranding of the carbon-intensive \u2018legacy\u2019 assets, such as drilling rigs or processing facilities, they replace (Office for Budget Responsibility, 2021<\/a>).<\/p>\n\n\n\nAlthough climate-economic analysis offers predictions of the physical impacts of climate change (extreme weather conditions, sea-level rise and ecosystem collapse) on the macroeconomy, they often omit the importance of transition impacts that may affect fiscal sustainability.<\/p>\n\n\n\n
It is now increasingly recognised that fiscal consequences of climate change, and the policy responses to it, will derive as much from climate transition as from direct physical damages (Volz et al, 2020<\/a>).<\/p>\n\n\n\nOne of the greatest transition risks relates to the skills required by workers in carbon-intensive industries becoming irrelevant in a net-zero economy. This rising human capital obsolescence may have significant social repercussions, where clean energy technology will be replacing a labour force unable to reskill.<\/p>\n\n\n\n
But as the global macroeconomic situation unfolds in the coming months and years, a stronger fiscal position \u2013 that is, balanced budgets, falling debt-to-GDP ratios, convincing stories about how current investments will spur long-term growth \u2013 will help to ease market expectations and borrowing costs. This should make it easier to finance the investments needed to reach net zero.<\/p>\n\n\n\n