city week – london, 24 april 2023 the role of central banks in the “ macroeconomics of climate change ” speech by francois villeroy de galhau, governor of the banque de france page 1 sur 8 ladies and gentlemen, it is once more a great pleasure and honour for me to give a keynote speech today at the city week in london, held in the venerable guildhall. it is no longer possible to seriously question the severe effects of climate change, but the role of central banks in this area has become an increasing focus of discussion. let me start by two very great temptations that have become typical pitfalls here. neither magic wand, nor ostrich policies we could call the first of these the « magic wand temptation » in which central banks are seen as being able to curb climate change on their own. i want to be crystal clear on this : central banks cannot be the only green game in town, they cannot replace sound public policies and corporate transition plans. one necessary step for public policies is to put a price on carbon : it is the only signal capable of aligning climate imperatives with economic agents ’ decisions. it is the only way to make more green projects profitable ; and green finance without enough green projects risks running idle. it can take various forms, including a carbon tax, in which case part of the resulting public receipts should be invested in low carbon alternatives, and another part redistributed to households in order to mitigate its social effects. a price on carbon should be supplemented with other climate regulations and subsidies to help develop alternatives sufficiently early. the second and opposite temptation is that of “ ostrich policies ”, which consist of burying our head in the sand to avoid seeing or hearing what is going on. this is not an option either. we are directly concerned, in two different ways [ slide 2 ]. page 2 sur 8 first as supervisors, insofar as climate - related risks are clearly among the long term risks to which financial institutions are exposed : monitoring these risks is not a “ nice to have ”, or part of a csr policy, but a “ must have ”. second, we are concerned as central banks in charge of price stability. just to clarify, we shouldn ’ t waste too much time here in the legal and political debate on centralbank mandates. central banks ’ core mandate worldwide is price stability, and climate change already affects the level of prices and activity – think of severe drought in argentina which

term scenarios with a five - year horizon as the transition is accelerating : the ngfs is currently elaborating on them by leveraging the work of its members, including by banque de france researchers iv. we at ngfs will publish a conceptual framework at end of this year, and are aiming to release a first vintage of these short - term scenarios by the end of 2024. in particular, they should display more adverse developments, and incorporate tougher shocks. they should also be tailored to explore the potential impacts of climate change, not just on activity but also on inflation. this quadrant [ slide 4 ] shows four categories of possible shocks linked to the transition. they can have a positive versus negative impact on supply, and a positive versus negative impact on demand respectively. they are not mutually exclusive, and may combine or succeed one another. their stand - alone probability is hard to assess at this stage, but there are reasons to believe that the upper - left one ( the negative supply shock ) is slightly more probable than the page 5 sur 8 others. however, given the large range of shocks, their sources and macroeconomic effects – which could include a positive scenario of large green private capex v – [ slide 5 ], we must continue our modelling, in line with our first commitment in relation to the ecb ’ s climate agenda : we committed in july 2022 to “ assess the macroeconomic impact of climate change and mitigation policies on inflation and the real economy ”. vi but being uncertain about the combined macroeconomic effects does not mean being passive or inert on action now. what we can already derive from these scenarios is a set of four firm convictions and prescriptions. 1. a shock that is global and certain > > > an orderly transition - first, climate transition entails structural changes to the global economy that are both universal and certain, with an overall and possibly negative supply shock that will generate frictions and costs in terms of the necessary reallocation of production factors. climate change is comparable to globalisation as seen several decades ago : we knew that it would have significant effects, inevitably and everywhere, while not knowing their magnitude ex ante. this means we should organise our transition to make it as early, predictable and orderly as possible ; this is not always an easy task in our democracies, but disorderliness page 6 sur 8 would be costly [ slide 6 ]. according to ngfs scenarios, for the same parisaligned emission reduction,