Bank of England rate-setter Megan Greene said the economic impact of climate change could be on the scale of the 1970s oil shock, requiring central bankers to make difficult choices.

Greene, who joined the BOE’s nine-member Monetary Policy Committee in July, chose to reference a paper from renowned French economist Jean Pisani-Ferry, who said that decarbonization efforts needed to minimize climate change could be “regarded as an adverse supply shock — very much like the oil shocks of the 1970s.”

Those events, triggered by politically driven oil embargos in the Middle East, caused UK inflation to hit more than 24%, plunged the economy into a series of recessions, and triggered a stock market meltdown.

Speaking in Sweden on a panel at the a conference organized by the Centre for Economic Policy Research, Sveriges Riksbank, the Bank for International Settlements and the European Central Bank, Greene said there was “a lot of work that we really need to do” on climate change.

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“The macro impacts are possibly huge, but the biggest impact really is that this amounts to a pretty significant supply shock,” she said. “We’re gonna have to mobilize huge amounts of funding and capital” to achieve the investment needed to hit net zero, she added.

Greene also refered to comments from former BOE governor Mark Carney, saying that “over the course of this century, climate change could just wipe out growth for the equivalent of 10 years.”

She noted that the true impact of climate change “depends so much on choreography, how long we dither before we really get address this.”

Her concern about the climate’s impact on the economy contrast with actions from Prime Minister Rishi Sunak, who this month watered down several green policies. Those included a forthcoming ban on the sale of traditional combustion engine cars. He also pushed back the deadline by which landlords must make their tenants’ homes more energy-efficient.

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Greene added that the long-term interest rate needed to keep inflation at the BOE’s target of 2%, known as R*, would also shift due to climate change — but it isn’t yet certain whether it would be higher or lower than it was pre-pandemic.

Factors pushing R* up would be a huge investment in green technology, which should boost productivity, and the fact that this may reduce the household wealth available to finance corporate investment.

But climate change would also likely mean assets carried a higher risk premium, households could conversely decide to hoard more wealth in the face of uncertainty, and climate disasters may hit productivity — all of which would push R* down.

All of that would “certainly affect what central banks are doing going forward” in terms of monetary policy, she said.

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