Physical risks arising from climate events can affect the development of the economy in several ways and on different time horizons. One way to distinguish between different types of climate events is to categorise them as either acute or chronic.^[13] For example, see “Climate change, the macroeconomy and monetary policy”, Network for Greening the Financial System, technical document, October 2024. Chronic events are of a more long-term nature and can span several decades. These include, for example, sea level rises, water scarcity and loss of biodiversity. The consequences of the chronic physical risks can be large, such as land areas becoming uninhabitable, conflicts arising over resources such as water or arable land, and the fact that many people are forced to migrate. The effects of these changes on monetary policy are of a more indirect nature. They are expected to influence factors that are relevant for the formulation of monetary policy, such as the neutral interest rate and potential output.^[14] See the analysis box “The Riksbank’s assessment of the long-term neutral interest rate” in the Monetary Policy Report, December 2024, and A. Seim (2024), “Neutral interest rate – significance, limitations and assessment”, speech at Sveriges Riksbank, 26 November.

Acute climate events include, for example, extreme weather such as hurricanes or heavy torrential rains, which can cause damage to the economy’s production capacity and lead to large price movements on various goods and services. The number of reported natural disasters is at a historically high level and shows great variation between years; see Chart 2. As inflation and economic growth can be directly affected by acute climate events, there can also be a direct impact on monetary policy. It is therefore important to understand the impact on the Swedish economy in order to make informed decisions.

Economic developments and thus the conditions for monetary policy are also affected by measures taken by governments and parliaments to combat climate change. They can give rise to transition risks. Measures such as taxes on carbon emissions or subsidies and regulations aim to provide incentives to steer production and consumption away from fossil-based activities. Structural changes are a natural part of all economic development. The transition to a sustainable economy is a structural change that is both expected and, at the same time, highly uncertain.^[15] For overviews see, for example, J. Hassler, P. Krusell and C. Olovsson (2024), "The Macroeconomics of Climate Change: Starting Points, Tentative Results, and a Way Forward", Working paper 24-8, Peterson Institute for International Economics, and J. Pisani-Ferry (2021), "Climate Policy is Macroeconomic Policy, and the Implications Will Be Significant", Policy Brief, Peterson Institute for International Economics.