This paper is a review of literature on the use of macroeconomic and financial policy tools for mitigating the impact of climate change. It was produced under the auspices of the International Monetary Fund. The paper recognises that climate change is undermining ecological systems on which human and all other forms of life depend. Mitigating climate change is therefore crucial to preserving the conditions for economic growth and life itself. Such mitigation requires a large-scale transition to a low carbon economy. It will involve a massive transformation in the structure of global economic activity. The paper states that markets alone cannot deliver sufficient mitigation, providing examples of both market and government failures. For this reason, the paper examines the “rapidly growing” literature on the role of macroeconomic and financial policy tools to determine the role that they can play in mitigation.

The paper begins with fiscal tools, related to the government budget and fiscal authorities, which it finds are “first in line and central”. There is a wide range of available fiscal policy tools, but, central to climate change mitigation is appropriately designed carbon pricing policies, the two main options being carbon taxation and emissions trading schemes. The paper gives examples and discusses their strengths and weaknesses, how they can be implemented and how they can be enhanced through government guarantees and spending.

The paper then turns to financial policy tools, being policies that affect financial markets and financial institutions. These policies help to mobilise private investments toward a low carbon economy and the paper discusses various types that have been proposed. The paper discusses the need to address the incorrect pricing of climate related risks and the need for increased transparency around those risks, referring to different laws and initiatives for that purpose. The paper then examines the development of markets for green finance, the factors that impede that development and how financial authorities can overcome them, including through the use of financial regulatory tools.

The final set of policy tools examined by the paper relate to monetary policy which has not traditionally been considered relevant for climate change mitigation. The paper discusses how central banks are increasingly contemplating supporting roles of monetary policy in climate change mitigation. The paper gives examples of how monetary policy can actively support the transition to a low carbon economy, in particular, “green quantitative easing”, being the use of quantitative easing to actively boost green asset prices. The paper discusses the implications for central banks in doing this in terms of restrictions that may be imposed by their mandates and the need to rethink their actual role.

The paper concludes that the policy challenge posed by climate change is complex. This includes the issue of “political economy” which relates to the impact that mitigation will have on certain populations and sectors and consequent measures governments view as being politically acceptable. The paper discusses the need for macroeconomic policy tools to be, therefore, well coordinated and designed but finds that literature on this is scarce and more research is needed.

1. Climate change is undermining the ecological systems on which human and all other forms of life depend. There is hence a need for climate change mitigation action to preserve the conditions for economic growth and life within earth systems.
2. Climate change mitigation requires a transition to a low carbon economy. This involves a deep and rapid transformation on a massive scale in the structure of economic activity and the productive structure of the global economy.
3. Market failures are at the root of climate change and prevent an appropriate response, a problem amplified by government failures. On their own, markets cannot adequately address the challenge of climate change mitigation.
4. A wide range of macroeconomic and financial policy instruments can affect climate change and should be part of the policy effort toward climate change mitigation. These include fiscal, financial and monetary policy instruments, the latter two being climate risk focused and climate finance promoting policies.
5. Fiscal policy is the “first-best theoretical benchmark policy” for climate change mitigation. The main options revolve around carbon pricing, spending and investment, public guarantees and the removal of carbon subsidies. By using fiscal policy as a climate change mitigation tool, governments are generating revenue while also pushing down carbon emissions.
6. Financial policy tools can play a key role in financing the low carbon transition. Such policies relate to better reflecting and pricing climate risks in financial balance sheets, financial stability frameworks, and supporting climate-related financial market development and reforms, including the development of green financial securities.
7. Monetary policy tools may play a role in climate change mitigation. Options include better reflecting climate risks in the portfolios of large-scale asset purchase programs or collateral frameworks, which are within current central bank mandates. More controversial proposals include financial regulation that explicitly favours green investments, central bank credit allocation operations, and adapting monetary policy frameworks.
8. Determining the most effective policy mix for climate change mitigation is crucial. Adding climate change mitigation as a goal in macroeconomic policy raises questions about how that interacts with other policy goals such as financial and price stability, an issue complicated by political economy considerations for which existing literature does not provide answers.
9. This research paper makes reference to the following important standards related to sustainable finance:
   • The 2015 Paris Agreement.
   • The Sustainable Development Goals.
   • Task Force on Climate Related Financial Disclosures.
   • The French Energy Transition Law.
   • Guidance on greening the financial system, issued by the People's Bank of China.
10. The research paper contains the following resources related to climate change mitigation:
    • A table containing a detailed explanation of “Social Value of Mitigation Action”.
    • A table giving examples of policy tools for climate change mitigation.
    • An appendix that contains a discussion of "Integrated Assessment Models" related to achieving a pre-determined level of climate stabilisation within a cost effectiveness framework.
    • A list of all of the references cited in the paper and making up the literature that was the subject of the review (pages 43-58).