benoit cœure : monetary policy and climate change speech by mr benoit cœure, member of the executive board of the european central bank, at a conference on " scaling up green finance : the role of central banks ", organised by the network for greening the financial system, the deutsche bundesbank and the council on economic policies, berlin, 8 november 2018. * * * 2018 has seen one of the hottest summers in europe since weather records began. 1 i would like to thank torsti silvonen, fabio tamburrini and sam langfield for their contributions to this speech. i remain solely responsible for the opinions contained herein. increasing weather extremes, rising sea levels and arctic melting are now clearly visible consequences of human - induced warming. 2 climate change is not a theory. it is a fact. while only one dimension of the human cost, the consequences in macroeconomic terms look set to be large. without further mitigation, cumulative emissions pose significant risks of economic disruption. 3 while there is a wide recognition that environmental externalities should be primarily corrected by first - best policies, such as taxes4, all authorities, including the ecb, need to reflect on, and consider, the appropriate response to climate change. in recent years, central bankers, led by bank of england governor mark carney, have started discussing the financial stability implications of climate change. 5 the first tangible results are trickling in. the financial stability board ’ s task force on climate - related financial disclosures published its first status report just a few weeks ago. only last week, ecb banking supervision communicated to banks that climate - related risks have been identified as being among the key risk drivers affecting the euro area banking system. and, of course, the central banks and supervisors network for greening the financial system published its first progress report just a few weeks ago, reasserting that climate - related risks fall squarely within the supervisory and financial stability mandates of central banks and supervisors. an area that has received less attention though, both in policy and in academia, is the impact of climate change on the conduct of monetary policy. today i would like to contribute to this debate and offer a way of thinking about how climate change fits into our current monetary policy framework – the way we react to shocks and the way we think policy propagates through the economy – and how it may affect our monetary policy implementation. i will argue that climate change can be expected to affect monetary policy one

. in the uk, we adopted a target for inflation as long ago as 1992 and the whole framework for taking decisions about interest rates was overhauled after the 1997 election. i am sometimes asked how different british economic history would have been if we had adopted the present approach to monetary policy at various landmark dates – such as 1976 or 1979. this is a hard one. tolstoy famously said that all happy families are alike, but unhappy families are each unhappy in their own way. it is rather the same with monetary policy. there are very many ways of getting it wrong – the uk has some experience here - but the hallmark of all good monetary policy is what hans dietrich tietmeyer ( president of the bundesbank in the 1990s ) used to call ‘ the three cs ’ : credibility, consistency, and continuity. my own view, for what it is worth, is that there has been a virtuous circle over the past 10 - 15 years when central banks have taken advantage of relatively benign global conditions to embed the three cs, by successfully implementing better policy - making frameworks and establishing strong reputations for competence on the back of excellent track records. the bank of england would have faced a tougher challenge in doing this in the economic circumstances of the 1980s, and certainly the 1970s – even if the political consensus had existed to support such an experiment ( which it didn ’ t ). even the bundesbank built up its formidable reputation during the german post war economic miracle. that said, i do not think there is any doubt that the new approach to monetary policy did represent a major advance on what went before. in what way? inflation targeting, the uk ’ s current approach, broke with past attempts to run an independent monetary policy by offering commitment and clarity. for the first time, the government and the bank of england committed to clear objectives, clear communications and clear lines of accountability. we now have a decision - taking framework which allows monetary policymakers plenty of room for discretion, while forcing them to provide a full explanation of their thinking. by hook or by crook, the fact is that central banks do now enjoy considerable credibility. they treasure that legacy, much like any blue chip company, and for many of the same reasons. credibility, and the trust that flows from it, is worth a great deal in policy - making, as in business. if people believe that the bank will act to keep inflation low and stable they will factor that in to their decisions. ( they may