The Role of Fiscal and Monetary Policies in Facing Climate Change Risks (Egypt as a Case Study)

This research aims to analyze the relationship between climate change risks and climate change policies and between macroeconomic variables, especially the monetary policy objectives of central banks and inflation expectations. The physical risks of climate change, as well as the risks of transitioning to a low-carbon economy, pose major challenges to macro-financial stability, as they can harm the financial budgets of governments, households, corporations, and financial institutions, due to negative impacts on investment and economic growth, financial revenues and expenditures, debt sustainability, and the valuation of debt, financial assets. Climate change will have negative effects on the aggregate demand side, as well as the aggregate supply side, during the coming decades. As a result, it may distort the performance of the economic and financial system. Evidence for this is the rising costs resulting from the increased frequency of extreme weather events. Likely, the direct effects of climate change will gradually increase over time as global temperatures rise. An attempt to control the macroeconomic vulnerability to climate change risks can be achieved by climate change policies that require structural changes in the economy. These policies can have significant financial implications, as climate change is a source of risks to the financial sector. Climate change's physical effects can increase banks' operational, credit, market, and liquidity risks. Climate change affects monetary and fiscal policies in different ways. By setting a carbon price, regulators aim to discourage the production and consumption of high-emitting goods. The carbon price can be set through a tax or a cap-and-trade system. However, these policies can also boost innovation, generate fiscal revenue, and reduce inflationary pressures while increasing energy efficiency and lowering the price of renewable energy.