Firstly, lower productivity growth leads agents to expect lower income growth in the future, prompting them to moderate their spending in the present. The resulting increase in saving exerts downward pressure on interest rates. Secondly, the increase in life expectancy in advanced economies has led households to increase their saving so as to finance their retirement period. Thirdly, rising demand for safe saving instruments in a context of high and growing economic uncertainty, coupled with a relatively scarce supply of such instruments, has put further downward pressure on equilibrium interest rates. Whatever its source, the decline in natural rates has shrunk the space for interest rate policy owing to the existence of a lower bound on nominal interest rates, thus making it harder for central banks to achieve our inflation aims. Climate change will likely affect the natural interest rate, but it is not obvious in which direction. On the one hand, it could further depress natural rates through negative effects on productivity, such as the impact of higher temperatures on labour supply and the destruction of capital stemming from natural disasters. Moreover, increased economic uncertainty associated with the impact from climate-related risks could lead to higher precautionary saving and further pull natural interest rates down. On the other hand, the transition towards a more sustainable economy will require substantial investment in green technologies, which may push equilibrium interest rates up. And if such investment succeeds in raising trend productivity growth, it could partially undo or even reverse the decline in natural interest rates.

Clearly, more time and analysis will be needed before we have better answers for this important question. Our role in climate policy action Let me now turn to the second theme of my talk, namely what financial supervisors and regulators, and central banks could or should do to assist governments in tackling climate change within our mandates. I will start with an important reminder. The main responsibility for addressing climate change resides with governments – namely, fiscal and environmental authorities– because they have the most effective tools and the legitimacy to do so. There is some consensus in the  3  literature that the most effective measure would be to apply Pigouvian taxes3 to carbon emissions. The latter, if well-designed, would lead agents to internalise the social cost of their carbon emissions, inducing a change in the relative prices of energy inputs and final outputs in favour of less carbon-intensive ones. That said, preventing climate change requires a holistic approach that involves all policies. Careful analysis should be devoted to the interactions of the various policy instruments in the economic sectors affected by transition and physical risks. The final aim should be to define an adequate “climate policy mix” that ensures the optimal achievement of environmental targets. In this context, and as part of our main responsibility to guarantee the stability of the financial system, we - regulatory and supervisory authorities - must ensure that the materialisation of climate risks does not endanger financial stability.