The FED recently held a groundbreaking climate change economics meeting, shedding light on the far-reaching impacts of climate change on a global scale. While integrating climate change variables into the dynamics of monetary policy poses challenges, estimates suggest that by 2100, climate change could potentially reduce real-world per capita GDP by 7 percent. A forward-looking approach known as the Green Interest Rate has emerged, proposing a negative externality tax on carbon emissions as a potent tool compared to providing subsidies to the alternative energy sector. This exemplifies climate mitigation (carbon taxes) versus climate adaptation (incentivizing renewable energy sources), both essential components of Climate Action SDG 13. Furthermore, Christine Lagarde is actively advocating for climate change to become a priority for the ECB.
Green interest rates facilitate and promote projects within the environment ecosystem that contribute to themes pertaining to climate action, and in some cases, they may also encompass initiatives related to biodiversity conservation. This is because the concept of green project varies and there have been instances of green washing. Discover more about these economic concepts in the comprehensive Online Course on Microeconomics offered by The middle Road, which delves into externalities in detail. Register for free to access Online Course on Microeconomics and other free courses.
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Implementing the Green Interest Rate could indeed serve as a substantial deterrent for carbon emissions, but a balanced approach combining both strategies is likely the way forward to effectively combat climate change. The key lies in shaping monetary policy while considering the budgetary implications of taxing carbon emissions. Nonetheless, the FED’s initiative in addressing and highlighting the effects of global warming is a crucial step in the right direction and deserves commendation.
Note: The article is reedited and posted with embedded video.