The FED recently convened the first climate change economics meeting to discuss the adverse effects of climate change globally. Though it’s challenging to include climate change variables within the dynamics of monetary policy, estimates that by 2100, climate change would reduce 7% from real-world per capita GDP. A forward-looking analysis is Green Interest Rate, a negative externality tax on carbon emissions will be a better bet and more potent tool as compared to providing subsidies to the alternative energy sector. This is an example of climate mitigation (carbon taxes) as compared to climate adaption (incentivizing renewable energy sources), both part of climate action SDG 13. Christine Lagarde is also pushing climate change to be part of ECB’s priority.
There is no doubt Green Interest Rate would be a massive deterrent for carbon emissions if implemented correctly. However, the way forward would be a blend of both the ways to keep in check climate change. The question remains of how the monetary policy will shape considering taxing carbon emissions would be more under a budgetary preview. At the same time, this is a welcome initiative by the FED in addressing and highlighting the effects of global warming.