output is likely to shrink by more than 4 %. without doubt, we can ill afford a sustained decarbonisation at such high economic costs. climate policy – and the accompanying economic policies – must do better than that, better than compromising the livelihoods of so many people and hitting the world ’ s poorest particularly hard. at the heart of the problem is a negative externality : while the burning of fossil fuels provides the originator with a beneﬁt, it harms everyone else, even generations yet to come. such social costs are not reﬂected in market prices. yet, as long as consumers and producers do not take these costs into account, we will burn too much coal, oil and gas. for once, economists broadly agree that an [UNK] policy to reduce greenhouse gas emissions must raise the price of carbon. this will provide the necessary incentives and information to consumers, producers and inventors. emissions trading systems ( or etss ) and carbon taxes are well - established instruments for the [UNK] reduction of emissions. both can achieve greater reductions for the same cost as other climate policies since they involve a market mechanism in the transformation process. but both approaches have to be implemented timely, consistently and credibly. a clear path of transition is essential for businesses as they need reliable perspectives to make the necessary longterm investments. there lies the rub. lack of recognition is not the problem. what is lacking is consistent and credible implementation. for example, the european union has been relatively ambitious in its climate policy and established an ets way back in 2005. however, the scheme covers less than half of total greenhouse gas emissions in the eu. ( non - aviation ) transport, buildings and agriculture are not yet included in the eu ’ s ets. these sectors are currently subject to a patchwork of national measures. it would be better to extend the ets and effectively establish a uniform carbon price across all sectors and eu countries. at the same time, a carbon price might need to be charged on certain imports from outside the eu. otherwise, companies could simply relocate production abroad, thereby shifting emissions while cutting jobs at home. also importers would have an unfair advantage. https : / / www. bundesbank. de / en / press / speeches / combating - climate - change - what - central - banks - can - and - cannot - do - 851528 2 / 8 20 / 11 / 2020 combating climate change – what central banks can and

intellectual bankruptcy of economic research. nearly two weeks ago, chancellor merkel also made reference to this. at the 5th lindau meeting on economic sciences ( attended by nobel laureates in this field ), she noted that “ we are coming from years in which one (... ) did not always have the impression that economics already knew everything about the future. ” many are now indeed wondering quite fundamentally what use economics is to society. the question of the usefulness of economics to society is probably also a reason why, at the aforementioned gathering of nobel laureates, the closing panel discussion was entitled “ how useful is economics – how is economics useful? ” 3. the lessons of the crisis ladies and gentlemen, christoph schmidt, chair of the german council of economic experts, was quoted in yesterday ’ s frankfurter allgemeine zeitung newspaper as saying bis central bankers ’ speeches that, “ despite the uncertainty surrounding our statements, our work is still important because we can contribute to imposing a limited amount of order on a complex and uncertain world without feigning false certainties. ” the job of economics is to explain economic interrelationships and to use these explanations as a basis for making economic policy designed to increase public welfare. economics is thus, if we accept that view, a discipline which is certainly of relevance to society. however, we must admit that economics has not always been up to the task. the financial crisis showed that there were many things about financial markets which we did not know, and that much of what we thought we knew was not reality - based. this is not least because, some of the time, economists act much like the one in the story i told you at the beginning. often, they were looking where the light was, not necessarily where the knowledge was. in that vein, precisely what the standard macroeconomic models were lacking was the financial sector, which made these models incapable of predicting the financial crisis. the framework of these models therefore needs to be broadened. in the meantime, many highranking economists are working on integrating the financial sector into standard macroeconomic models : mark gertler, lawrence christiano, massimo rostagno, roberto motto and markus brunnermeier, to name but a few. although progress is being made, research has not yet reached the finishing line. but why was the financial sector missing from the models? well, it is undoubtedly very difficult to model it mathematically. this seems to have been a hurdle initially