PhotoA senior policy adviser working with the Federal Reserve says that the negative impact of climate change won’t just stop at the environment; it could also lead us into our next financial crisis.

In an economic letter published on Monday, Glenn D. Rudebusch explained that environmental changes, as well as the way that society prepares for those changes, could have important consequences for the U.S. economy. He urges policymakers to plan accordingly to avoid the worst possible outcome.

“Some central banks...recognize that climate change is becoming increasingly relevant for monetary policy,” he said. “For example, climate-related financial risks could affect the economy through elevated credit spreads, greater precautionary saving, and, in the extreme, a financial crisis.”

The costs of natural disasters

In his report, Rudebusch says that natural disasters and changing conditions could cause great harm to certain industries. Hurricanes, extensive flooding, or droughts could lead to infrastructure damage, agricultural losses, and price spikes for certain commodities that will hurt consumers and businesses financially.

Of course, those risks aren’t just present in the U.S. Rudebusch says that disasters in different areas of the world affect everyone because of the connectedness of the global economy.

“Even weather disasters abroad can disrupt exports, imports, and supply chains close to home,” he said.

Greener technologies and policies

While many nations are exploring options when it comes to converting to a low-carbon, environmentally friendly economy, Rudebusch says that the Fed is not able to tailor all of its policies towards these initiatives. However, he does say that certain government actions, such as introducing a carbon tax, could spur industries to adapt to cleaner technologies.  

“A carbon tax that is set at the proper level can appropriately incentivize innovations in clean technology and the transition from a high- to a low-carbon economy,” he said.

“A comprehensive set of government policies may be required, including clean-energy and carbon-capture research and development incentives, energy efficiency standards, and low-carbon public investment.”

Rudebusch’s full report can be viewed here.

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