Climate Change | Climate and the economy

Climate change has potential to do significant economic harm, and poses worrying tail risks. It is a global externality—one country’s emissions affect all countries by adding to the stock of heat-warming gases in the earth’s atmosphere from which warming arises. 

The process of climate change is set to have a significant economic impact on many countries, with a large number of lower income countries being particularly at risk. Macroeconomic policies in these countries will need to be calibrated to accommodate more frequent weather shocks, including by building policy space to respond to shocks. Infrastructure will need to be upgraded to enhance economic resilience.

Elsewhere, climate change can entail significant risks to macrofinancial stability. Nonfinancial corporate sectors face risks from climate damages and stranded assets—such as coal reserves that become uneconomic with carbon pricing—and the disruption could affect corporate balance sheet quality.