Dr Andrew Sentance

1
Tackling climate change Are there lessons from
monetary policy?

• Dr Andrew Sentance
• Warwick University and Bank of England
• Economic Research Council
• 20th February 2008

2
Outline

• Key elements of successful monetary policy
• Monetary policy and climate change
• Common challenges
• Important differences
• Potential lessons for climate policy
• Frameworks policy instruments transmission
  mechanism processes/institutions
  credibility/expectations
• Conclusions

3
UK and G7 Inflation
Note UK figures are consumer expenditure
deflator prior to 1976 Source OECD and ONS
4
Monetary policy Key elements

• Objective, framework and target(s)
• Clearly identified policy instrument(s)
• Understanding of transmission mechanism
• Expectations play a key role in influencing
  behaviour
• Robust, independent and credible process
• Communication, transparency and accountability
  reinforce expectations and credibility

5
Some common challenges

• Stability objective
• High damage potential from policy failure
• Economic instruments needed to change wide range
  of behaviours
• Establishing robust processes
• Building credibility and consistency

6
Stabilisation levels for global warming
400 ppm CO2e
5
95
450 ppm CO2e
550 ppm CO2e
650ppm CO2e
750ppm CO2e
Eventual temperature change (relative to
pre-industrial level)
6C
1C
2C
5C
4C
3C
0C
Source Stern Review
7
Stabilising the global climate
Source Stern Review
8
CO2 Emissions targets in context
10
8 GtC/yr now
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Stabilisation at 450 ppmv requires a 60 cut in
global CO2 emissions by 2050
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Global CO2 Emissions (GtC/yr)?
4
3 GtC/yr by 2050
..and continuous reductions beyond 2050
2
2300
1900
2200
2000
1950
2100
2050
9
Keynes on inflation (1919)

• "There is no subtler or surer means of
  overturning the existing basis of society than to
  debauch the currency. The process engages all the
  hidden forces of economic law on the side of
  destruction, and does it in a manner which only
  one man in a million is able to diagnose."

10
Blair on climate change (2006)

• The scientific evidence of global warming
  caused by greenhouse gas emissions is now
  overwhelming. It is not in doubt that if the
  science is right, the consequences for our planet
  are literally disastrous.

11
Projected impacts of climate change
Global temperature change (relative to
pre-industrial level)
6C
1C
2C
5C
4C
3C
0C
Food
Falling crop yields in many areas, particularly
developing regions
Falling yields in many developed regions
Possible rising yields in some high latitude
regions
Water
Significant decreases in water availability in
many areas, including Mediterranean and Southern
Africa
Small mountain glaciers disappear water
supplies threatened in several areas
Sea level rise threatens major cities
Ecosystems
Extensive Damage to Coral Reefs
Rising number of species face extinction
Extreme weather events
Rising intensity of storms, forest fires,
droughts, flooding and heat waves
Risk of abrupt and major irreversible changes
Increasing risk of dangerous feedbacks and
abrupt, large-scale shifts in the climate system
11
Source Stern Review
12
Building the low carbon economy
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Some common challenges

• Stability objective
• High damage potential from policy failure
• Economic instruments needed to change wide range
  of behaviours
• Establishing robust processes
• Building credibility and consistency

14
Some important differences

• Natural vs social systems
• International vs national frameworks
• Different time horizons
• Different policy instruments
• Development of policy frameworks

15
Potential lessons

• Objective, framework and target(s)
• Policy instrument(s)
• Transmission mechanism
• Processes and institutions
• Credibility and expectations

16
Objective, framework and target(s)

• Political consensus needed to underpin stability
  and consistency of policy objective
• Mature policy frameworks (eg UK) embody a
  considerable period of learning
• Framework and target can be tailored to suit
  different national requirements
• International policy frameworks require long-term
  commitment political/institutional underpinning
• Ad hoc short-term international co-operation has
  not worked well

17
Policy instrument(s)

• Use of monetary policy instruments has evolved
  through time with development of markets
• Single policy instrument approach reflects highly
  developed market structure and relies on
  credibility and expectations
• Multi-instrument policy (including regulation and
  direct intervention) used when policy was less
  mature
• Independent bodies have assumed greater control
  over policy instruments as frameworks have
  evolved and developed credibility

18
The transmission mechanism of monetary policy
Source Bank of England
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Processes and institutions

• Importance of evolution in establishing
  institutions and processes
• National processes and institutions have
  borrowed from international experience
• Involvement of experienced, expert and
  independent individuals
• Clear timetables for action and reporting
  supports credibility and underpins independence

20
Credibility and expectations

• Stability of expectations underpins successful
  monetary policy
• In climate change policy, expectations can
  similarly underpin investment technology
• Expectations hinge on credible and stable policy
  frameworks, which evolve over time
• Communication, transparency and accountability
  reinforce credibility and expectations

21
Conclusions

• Experience with development of monetary policy
  can inform development of climate change policy
• Need to recognise differences in policy challenge
  and less mature/developed markets, institutions
  and processes
• International institutions and frameworks will
  need to play a larger role in climate change
  policy
• Multi-instrument approach may be better suited to
  current phase of development of climate change
  policy
• A better model of the transmission mechanism to
  deliver a low-carbon economy needs to be
  developed
• Establishing clear expectations of future policy
  and credible institutions to underpin them is a
  major challenge for climate policy