Crisis Squared: When climate crisis meets economic crisis

Crisis Squared: When climate crisis meets economic crisis

We’re living in a crisis – a climate crisis. And there will be a new economic crisis – we don’t know when, nor what form it will take, but we know it will come.

What happens when they meet?


The last financial crisis revealed structural problems in the global economy. It led to major interventions by financial authorities, including some instruments then thought as novel, such as Quantitative Easing.

It’s more than a decade later, and with interest rates near zero, central banks still cannot use their traditional tools. Even their ability to use the tools deployed following the 2008 crisis will be limited.

New measures will be required which reflect the current economic context. We need to redirect financial flows towards rapid decarbonisation of the economy, and to strengthen societal resilience to climate impacts. The financial system must also become resilient to the stability risks that arise both from climate change and from the policy response to it.

Getting ready for the inevitable

A range of market signals suggests a new economic crisis is coming. As recently expressed by the International Monetary Fund’s David Lipton, “storm clouds [are] building, [but] the work on crisis prevention is incomplete.” The next shock will not be the same as the last one so fiscal authorities, central banks and financial supervisors will need to act quickly and flexibly.

However, in all the plentiful literature about what form that stimulus should take (and there is little consensus as to what these measures should be) only a few contributors have considered sustainability impacts.

In general, research suggests central banks will need to work with other institutions such as fiscal authorities, e.g. to combine monetary action with fiscal measures. Some suggest we will need adjustments to central bank mandates, so that they can be more interventionist in relation to structural economic issues such as climate change, departing from the principle of ‘market neutrality’. Our colleague Dileimy Orozco’s blog on the role of central banks takes that one head on.

The experience of 2008 suggests that with events moving fast it will be difficult to integrate sustainability goals into a rapid response unless there is already a menu of options on the table. The playbook that we have developed with the Stanley Center for Peace and Security shows what might be on the menu, but as that paper makes clear, this is just a list of options, not an analysis, and still less a series of options or prescriptions.

The truth is stakeholders lack an objective review of the proposals in circulation. That’s why we are delighted to be supported by the INSPIRE network, partnering with SOAS and the South East Asian Central Banks (SEACEN) Research and Training Centre, to catalogue the various proposals in play. We will consider the theoretical and empirical evidence underpinning different policy proposals for crisis response. We will discuss related political economy work and practical challenges together with their potential environmental impacts, while noting the known impacts of previous crisis responses.

Our goal for when this project is complete at the end of 2020 is to have built a digestible menu of options for central bankers, financial regulators and governments which could directly inform their decisions at a time of crisis.


This year promises to be a high-stakes one, potentially pivotal for the global economy. The choices we make in the coming months may shape the direction of travel for years to come. If you would like to be involved in this work please feel free to reach out to Ronan and Kate, and keep following E3G’s news by signing up for our newsletter here.

Further reading

In developing our thinking here, we have been drawing on a wide range of resources. If you want to read further into this, some of the papers we have read are listed below.

On options for a stimulus for a future crisis see:

  • Ad van Riet (ed., 2010), Euro Area Fiscal Policies and the Crisis, ECB Occasional Paper No. 109, Frankfurt: European Central Bank;
  • Frederic S. Mishkin (2009), Is Monetary Policy Effective during Financial Crises?, American Economic Review 99(2), pp. 573-577;
  • Lawrence J. Christiano, Christopher Gust & Jorge Roldos (2004), Monetary Policy in a Financial Crisis, Journal of Economic Theory 119(1), pp. 64-103;
  • Christina D. Romer & David H. Romer (2019), Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why, NBER Working Paper No. 25768, Washington, DC: National Bureau of Economic Research;
  • Alan S. Blinder, Michael Ehrmann, Jakob de Haan & David-Jan Jansen (2016), Necessity as the Mother of Invention: Monetary Policy after the Crisis, NBER Working Paper No. 22735, Washington, DC: National Bureau of Economic Research;
  • Daisuke Ikeda & Takushi Kurozumi (forthcoming), Slow Post-financial Crisis Recovery and Monetary Policy, American Economic Journal: Macroeconomics.

On the sustainability impacts of an economic stimulus, see:

  • Richard Murphy & Colin Hines (2010), Green Quantitative Easing: Paying for the Economy We Need, Norfolk: Finance for the Future;
  • Rob Macquarie (2018), A Green Bank of England: Central Banking for a Low-Carbon Economy, London: Positive Money;
  • Alfie Stirling, David Powell & Frank Van Lerven (2019), Changing the Fiscal Rules: Unlocking Public Investment for a Green New Deal, London: New Economics Foundation.
  • Elga Bartsch, Jean Boivin, Stanley Fischer & Philipp Hildebrand (2019), Dealing With the Next Downturn: From Unconventional Monetary Policy to Unprecedented Policy Coordination, London: BlackRock Investment Institute.


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