WHAT happens to an economy when it is hot outside? Globally, record-breaking temperatures have been witnessed in the past few years. There is evidence that heatwaves dampen economic output, causing GDP losses and exacerbating global inequality. For instance, projections for the US economy show that rising temperatures could reduce economic growth by up to one-third over the next century.
Moreover, the assumption that economic damage from global warming is confined to the agriculture sector is no longer true, as climate change and environmental degradation pose significant risks to the macro economy and financial systems. For example, climate change will affect individual and household income, sectors of the economy, energy markets, inflation variability, financial markets, innovation, and rising public debt, among other things.
While rising global temperatures have a profound impact on economies all over the world, the phenomenon is still poorly understood due to the complexity of climate-related risks and their interactions with the real economy. Scientific studies are being conducted to estimate the impact of global warming on different sectors of the economy. However, there is consensus that macro-prudential measures........