Carnegie Mellon University
July 15, 2021

Muller's research featured in WESA

Lester and Judith Lave Professor Nicholas Muller’s recent research was featured by WESA in their article on Muller’s proposed “green interest rate.” In his recently released working paper, On the Green Interest Rate, Muller notes how environmental damage from climate change comes with economic costs.

“Pollution damage — whether we're talking about air pollution or greenhouse gases or other things — affects [economic] growth through things like premature mortality and health costs [as well as] property damage,” Muller told WESA.

In his paper, Muller argues that the Federal Reserve could help manage these environmental impacts by adding environmental stability to its formula for the calculation of interest rates. His analysis proposes a green interest rate that transmits information on pollution damages to borrowers and lenders. This policy would mitigate damage to the economy by reallocating consumption from periods when output is more pollution-intensive to when output is cleaner.

For economies on a cleaning up path, a green interest rate would potentially delay consumption to a less pollution-intensive future. In contrast, in economies that are becoming more polluted, the green interest rate would incentivize consumption in the currently less polluted economy at the expense of consumption in the more polluted future.

“If the economy is getting rapidly dirtier per dollar of consumption,” Muller said, “we want more consumption in the present when the economy is relatively cleaner than we want in the future as it's getting dirtier and dirtier.”

Citing the lack of comprehensive climate legislation from Congress, while also acknowledging current social obstacles to meaningful climate policy, Muller has offered up a green interest rate as an alternative for climate action.

To read the WESA article, go here.