In a new blog post, the European Central Bank examines how the uneven effects of climate change and the transition to a carbon neutral economy can amplify and prolong shocks to inflation, economic activity and financial stability. Losses concentrated among lower income households, smaller firms, emissions intensive sectors or less diversified regions may spread through labor, product, housing and financial markets, particularly where those affected have limited capacity to adapt or absorb higher costs. Climate events and transition policies can raise food and energy prices, increase wage pressures and weaken household spending. They can also reduce productivity and labor demand, depress exposed property and collateral values, increase credit risk and loan defaults, and constrain financing for firms adjusting to cleaner technologies. If transition costs are perceived as unfair, weaker public support could create policy uncertainty and stop and go dynamics that heighten the risk of a disorderly transition. For central banks, the key considerations are whether these shocks are temporary or persistent and how widely they can spread, rather than how their costs should be distributed.
European Central Bank examines how unequal climate impacts can amplify price and financial stability risks
The European Central Bank examines how unequal exposure to climate change and transition policies can magnify risks to inflation, economic activity and financial stability. Higher essential costs, weaker employment and productivity, falling collateral values and increased credit risk can spread localized shocks across the economy, while perceived unfairness may raise the risk of a disorderly transition.