As the deadlines for the 2015 Paris agreement targets approach, the macroeconomic implications of climate change are attracting closer attention from policy-makers, risk professionals and economists. Global headwinds are tempering optimism: fiscal constraints and continued geoeconomic fragmentation threaten to slow the pace of the energy transition.

This edition of the Bulletin and the Sustainable Policy Institute Journal examines the risks – and opportunities – to the macroeconomy stemming from the green transition. It features contributions from the public and private sector on the impact of greenflation on labour markets and productivity, as well as the outlook for global growth.

The transition is expected to have significant implications for price stability – a point which has raised questions over whether central banks should look to be more accommodative when responding to future energy price shocks.

Stephane Dees, head of climate economics at Banque de France, describes how policies aimed at supporting the transition to carbon neutrality could lead to more inflation (or greenflation). The net effect will depend on both expansionary and contracting supply-and-demand dynamics. However, ‘if not properly anticipated, the transition to carbon neutrality could also lead to a rapid succession of shocks, increasing price volatility’.

Price stability is also likely to be indirectly influenced by structural changes to labour market conditions. The rising severity of physical risks associated with climate change poses a threat to millions of jobs in ecosystem-dependent industries, as well as those employed in sectors incompatible with the transition to a carbon-neutral economy.

New ‘green’ jobs will look to make up part of this difference. However, stark mismatches exist both within and between countries, writes Joseph Feyertag, policy fellow at the Grantham Research Institute at London School of Economics. Understanding these imbalances is of critical importance for policy-makers. ‘Overly tight labour markets not only represent a risk for governments attempting to achieve net zero goals, but for central banks and financial supervisors’ core price and financial stability objectives.’

The impact on countries and regions will not be homogenous and the economic costs of climate change are particularly acute for emerging markets. Capacity for financing climate mitigation projects is more constrained here, while the proportion of output and employment concentrated in climate-vulnerable sectors raises the risks of economic disruption.

This is true for much of Asia Pacific, where the impacts of climate change threaten to curtail the region’s high growth trajectory. Much of Asia’s growth miracle has stemmed from an increase in polluting activities, and ‘it is often said that the battle against climate change will be won or lost in Asia,’ write Declan Magee, principal economist for climate change and sustainable development, and Abdul Abiad, director of macroeconomics economic research and development impact at Asian Development Bank. ‘Achieving development goals while avoiding catastrophic climate risks cannot be done without transforming Asia’s growth patterns.’

Facilitating a structural shift in growth drivers will require a well-formulated package of policies. Scaling up climate finance is an important lever in this mix. Marcus Pratsch, head of sustainable bonds and finance, DZ BANK AG, argues that the financial sector, by taking a more holistic view of the transition, will play a key role in the transformation process. ‘We can have a much greater positive impact on the global sustainability agenda by helping to make less sustainable economic activities more sustainable rather than making already green economic activities a shade greener.’

Contributors noted that the treatment of transition minerals – critical to the development of green technologies – into strategic assets are another source of uncertainty. These challenges compound the uncertainties associated with modelling the impacts of climate change. As Sebastian Werner, head of climate risk scenario design at Citi, points out, some assessments ‘ignore model uncertainty, nonlinearities and mispricing of risks’.

Insufficient data is a key obstacle here, as reflected by its persistence as the top challenge to environmental, social and governance integration for central bank reserve managers in OMFIF’s Global Public Investor research.

Despite these challenges, Amiot Marion, head of climate economics, and Paul Gruenwald, global chief economist, at S&P Global Ratings, observe that improvements in energy efficiency and the promise of innovation in green technology can inspire optimism. ‘The climate policy paradigm has moved from a view where the economy must be constrained to mitigate climate change, to one where growth and a sustainable environment can coexist’.