Macroeconomic policies for climate change

Abstract

This thesis aims to give a broad and detailed view of the functioning of macroeconomic policies in the context of environmental sustainability. In the historical period in which we find ourselves, the need for an economic transition to a low-emission and more environmentally friendly economy is compulsory if not urgent. The outcome of this challenge lies in the efficiency of resource allocation and the ability to implement transactional policies without damaging the current economic situation. In this respect, the first step towards a more sustainable economy is to outline objectives, as described in chapter one. International institutions, governments and unions of countries have agreed to set common targets for reduction. The Paris Agreement, the Kyoto Protocol and the Green Deal are examples of this. As explained in chapter two, achieving these targets requires the implementation of macroeconomic policies aimed at climate mitigation, supporting green sectors and accelerating the transition, without harming the economic sectors that currently contribute to the economy. Fiscal policies and related instruments, such as carbon taxes and green subsidies, have the role of redistributing resources and capital according to the pollution produced by companies. Monetary policies play an extremely important role in supporting the economy in this transitional period by maintaining financial and price stability. Instruments such as quantitative easing promote liquidity and confidence in economic recovery. Market regulations allow for direct action in the behaviour of companies, limiting the amount of emissions and encouraging innovation and efficiency. Such policies, if not implemented or used without prior analysis, could expose key economic actors to the physical and transitional risks of climate change. Information and compliance with sustainable criteria (such as ESG criteria) play a crucial role in protecting global production by educating companies and setting standards to be met, without damaging competitiveness. Finally, macroeconomic policy issues involve a tradeoff between competing forces in the economy. The question is how to assess the magnitude of these forces within an economic system. Applying this concept to the context at hand, the introduction of macroeconomic policies, and related instruments, for environmental sustainability must be taken into account in the development phase of economic models. This phase is crucial for monitoring the implications of climate change and related policies for the economy, the financial system and the transmission of monetary policy through financial markets and the banking system to households and businesses.