Also, climate-related shocks have uneven macroeconomic effects, with adverse consequences concentrated in countries with relatively hot climates, such as most low-income countries. See IMF (2017), “The Effects of Weather Shocks on Economic Activity: How Can Low-Income Countries Cope?”, World Economic Outlook, Chapter 3, October. 8 For price effects, see also Parker, M. (2018), “The impact of disasters on inflation”, Economics of Disasters and  Climate Change, Vol. 2(1), pp. 21–48. 9 See, for example, Gourio, F. (2015), “The effect of weather on first-quarter GDP”, Chicago Fed Letter, No 341. 10 Academic studies project that the risks of extreme heatwaves and floods will increase by around another 50%  this century. See Mann et al. (2018), “Projected changes in persistent extreme summer weather events: The role of quasi-resonant amplification”, Science Advances, Vol 4(10). And evidence of such an increase is already visible. According to the European Academies’ Science Advisory Council, the number of global floods and other hydrological events has quadrupled since 1980 and doubled since 2004. See European Academies’ Science Advisory Council (2018), “Extreme weather events in Europe – Preparing for climate change adaptation: an update on EASAC’s 2013 study”, March; and Stott, P. (2016), “How climate change affects extreme weather events”, Science, Vol 352(6293), pp. 1517–1518. 11 See, for example, Weitzman, M. (2011), “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate  Change”, Review of Environmental Economics and Policy, 5 (2), pp. 275–292; and Weitzman, M. (2009), “Additive damages, fat-tailed climate dynamics, and uncertain discounting”, Economics — The Open-Access, Open-Assessment E-Journal 3: 1–29.

Climate change may raise the odds of this happening. Relative prices and inflation expectations in the transition towards a low-carbon economy This brings me to the second scenario in which humanity succeeds in accelerating the transition to renewable sources of energy. Although clearly more desirable for society, it may also create trade-offs for central banks. Along this trajectory, the marginal cost of harvesting renewable energy may become considerably lower and more stable than in the current regime, in which changes in the effective supply of oil have been a recurrent source of disruption.18 In other words, a lasting shift in the energy mix can be expected to persistently change relative prices. Although such a change should in principle not bear consequences for monetary policy, if large and persistent enough, it could feed into expectations and affect aggregate inflation. To see the consequences for monetary policy, consider the events of recent years. A sharp fall in commodity prices pushed headline inflation into negative territory towards the end of 2014. But because the fall in commodity prices proved so persistent – headline inflation remained close to zero until late in 2016 – we saw growing signs that firms, households and financial market participants had started revising down their medium to long-term inflation expectations, away from the levels we consider as being consistent with price stability. The prevalence of substantial economic slack fed this process further.