This article reviews the rapidly proliferating economic literature on climate change and financial policy. We find: (1) modeling objectives shifting toward target-based approaches, scenarios analysis, and institutional systems-dynamics models as a way to make progress despite ethical concerns around discount rates and irreducible uncertainty in climate physics-economic behavior dynamics; (2) emerging evidence of financial markets pricing in climate-related risks but little evidence that climate risks are priced inadequately; and (3) a range of significant institutional distortions preventing climate-efficient pricing that models are now beginning to capture to better align financial market outcomes with climate change. We identify some particularly promising areas of future work, including better evaluation of losses-given-defaults under permanent climate shocks and additional integration of financial system frictions into the rapidly growing literature on climate and financial stability.
Climate Change and Financial Policy: A Literature Review
I thank the editor and two anonymous referees for valuable comments and improvements. I also thank many colleagues at the Federal Reserve Board and elsewhere for helpful discussions and comments. The views in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System. All errors and omissions are solely the author’s responsibility.
Dennis BN (2023), "Climate Change and Financial Policy: A Literature Review". International Review of Environmental and Resource Economics, Vol. 17 No. 2-3 pp. 231–318, doi: https://doi.org/10.1561/101.00000153
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