International Review of Environmental and Resource Economics > Vol 17 > Issue 2-3

Climate Change and Financial Policy: A Literature Review

Benjamin N. Dennis, Federal Reserve Board of Governors, Washington, D.C., USA,
Suggested Citation
Benjamin N. Dennis (2023), "Climate Change and Financial Policy: A Literature Review", International Review of Environmental and Resource Economics: Vol. 17: No. 2-3, pp 231-318.

Publication Date: 15 Jun 2023
© 2023 B. N. Dennis
Biases,  Heuristics,  Uncertainty,  Collective action,  Principal-agent,  Climate change,  Financial markets
JEL Codes: G28Q54Q58
Climate changeclimate-financeclimate-related riskmicroprudential policymacroprudential policy


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In this article:
1 Introduction 
2 Is Climate Change Risk Quantifiable? 
3 Are Markets Efficient with Respect to Climate Change? 
4 Institutional Distortions and Other Externalities 
5 Conclusions and Recommendations 


This article reviews the rapidly proliferating economic literature on climate change and financial policy. We find: (1) modeling objectives shifting toward target-based approaches, scenarios analysis, and institutional systems-dynamics models as a way to make progress despite ethical concerns around discount rates and irreducible uncertainty in climate physics-economic behavior dynamics; (2) emerging evidence of financial markets pricing in climate-related risks but little evidence that climate risks are priced inadequately; and (3) a range of significant institutional distortions preventing climate-efficient pricing that models are now beginning to capture to better align financial market outcomes with climate change. We identify some particularly promising areas of future work, including better evaluation of losses-given-defaults under permanent climate shocks and additional integration of financial system frictions into the rapidly growing literature on climate and financial stability.