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Climate change more strongly linked to downside economic growth risks: Fed paper

·3 min read

A working paper from a researcher at the nation’s central bank warns that climate change could hold back economic growth, extending the Federal Reserve’s foray into climate research despite some political backlash in D.C.

In research published in July, Fed economist Michael Kiley observed “very strong” impacts of rising temperatures on downside risk to GDP growth.

“An increase in average temperature associated with climate change may increase the volatility of economic growth and lead to additional downside skew in year‐to‐year fluctuations in economic growth, as the empirical relationship between temperature and downside risks to growth is strong,” Kiley wrote in the working paper.

Kiley examined over 30 years of data covering real GDP per capita and temperature changes across 124 countries.

Whereas other papers have addressed the impact on average growth rates, the Fed paper specifically examined the distribution of risks, concluding that downside risks to growth are more strongly linked to temperature than upside risks to growth.

The paper is the latest from the Federal Reserve system, which has ramped up its interest in the economic impact of climate change. The Federal Reserve Bank of San Francisco has hosted seminars and conferences on the topic, and the bank’s president, Mary Daly, has been particularly vocal about the need for economists to factor in climate risks.

'Emotionally-charged political arena'

As one of the nation’s top bank regulators, the Fed has started brainstorming ways to codify climate risks into its regulatory framework.

Through efforts led by Fed Governor Lael Brainard, the Fed has floated the idea of a “scenario analysis” that would examine the ability of individual firms and the financial system at large to handle different hypothetical climate shocks.

But the Fed has faced pushback from Republicans on Capitol Hill, who have argued that the central bank is stepping outside of its congressional mandate in exploring climate change.

“This approach has inserted the Federal Reserve into the emotionally-charged political arena — a place where the Federal Reserve seldom has ventured, and for good reason,” said Pennsylvania Senator Pat Toomey, the Senate Banking Committee’s top ranking Republican.

Those inside the Fed who have championed climate research have maintained that the potential for climate to weigh on economic growth makes it relevant to the central bank’s dual mandate of maximum employment and stable prices.

In December, the Fed joined the Network of Central Banks and Supervisors for Greening the Financial System, a coalition designed to facilitate the sharing of climate research and best practices among the world's central banks.

“We have to be a forward looking Federal Reserve, we have to do our work so that we understand the risks around us so that we can fully achieve the mandates we've been given by Congress, and that's why we work on these topics,” Daly told Yahoo Finance in April.

Still, Fed Chairman Jerome Powell has promised lawmakers that the central bank does not aspire to become climate policymakers, emphasizing that the central bank will prioritize “significant public engagement and great transparency” as it addresses climate-related financial risks.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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