Climate Emergency Demands Rethink of Economic Policymaking#

Climate Costs Hit Global Economies#

The climate emergency is absorbing vast resources and driving price volatility:

• Chocolate prices in the UK surged by 18% annually, per the Office for National Statistics, due to weather-related cocoa crop failures in West Africa.
• In the US, Bloomberg Intelligence reported $1 trillion spent in 2024 on rebuilding and recovery from wildfires and floods, diverting funds from other economic priorities. Companies like Home Depot and Heidelberg benefit, but at the cost of broader economic strain.
• A US study from the IZA Institute of Labor Economics found wildfire smoke reduces worker earnings by up to 2% ($125 billion annually), with older workers hit hardest, highlighting a dual health and economic crisis.

These examples underscore how climate disasters are redistributing global spending toward repair and resilience, squeezing resources elsewhere.

Sellers’ Inflation Fuels Price Hikes#

Research by Isabella Weber and colleagues, analyzing over 100,000 earnings calls from 5,000 US companies (2007–2022), reveals a troubling trend: during cost shocks, companies exploit rising costs to raise prices and boost profit margins. This phenomenon, dubbed “sellers’ inflation,” arises from an implicit coordination mechanism where executives assume competitors will also hike prices, and consumers will tolerate increases during crises.

This markup-driven inflation complicates traditional monetary policy. Central banks’ reliance on interest rate hikes is a blunt tool against climate-driven cost shocks, failing to address the underlying opportunistic pricing by firms.

Rethinking Policy for a Hot and Volatile World#

To tackle climate-induced inflation, policymakers need a toolbox approach beyond rate hikes:

• Buffer Stocks: Maintain reserves of essential commodities to stabilize prices during shortages.
• Anti-Profiteering Measures: Crack down on companies exploiting cost shocks for unfair profits.
• Price Controls: In extreme cases, implement temporary caps to curb price gouging.

Researchers David Barmes and Luiz Awazu Pereira da Silva from the LSE’s Grantham Research Institute advocate for “adaptive inflation targeting”:

• Tolerate Short-Term Blips: Allow central banks to look through transient climate-driven price spikes.
• Flexible Targets: Temporarily raise inflation targets or widen target ranges during repeated shocks.

High interest rates, they argue, fail to address climate shocks and raise government borrowing costs, hindering public investment in the green transition.

Infrastructure for a Changing Climate#

Just as homes built for milder climates struggle with 30°C heatwaves, economic policymaking must evolve. The climate emergency demands infrastructure—both physical and policy—that anticipates frequent shocks and prioritizes sustainability. Failing to adapt risks amplifying economic volatility and social costs.

Key Highlights#

• Climate Costs: Wildfires, floods, and crop failures drive $1 trillion in US recovery spending and 18% UK chocolate price hikes.
• Sellers’ Inflation: Companies exploit cost shocks to boost profit margins, complicating inflation management.
• Policy Tools: Buffer stocks, price controls, and anti-profiteering measures offer alternatives to interest rate hikes.
• Adaptive Targeting: Tolerating climate-driven price spikes and flexible inflation targets support the green transition.
• Urgent Adaptation: Economic policymaking must align with the climate emergency to mitigate volatility and costs.

Conclusion#

The climate emergency is reshaping economies through cost shocks, health impacts, and resource reallocation. Traditional interest rate hikes are ill-suited to combat sellers’ inflation driven by climate crises. By adopting a toolbox approach—including buffer stocks, price controls, and adaptive inflation targeting—policymakers can better navigate this hot and volatile world. As climate disruptions intensify, aligning economic policy with sustainability is not optional—it’s essential for stability and equity.