Why Climate Policy and Populism Are Holding Back Economic Growth, According to the Bank of England

17th January 2026

In recent years, a striking shift has taken place in the language used by central banks. Institutions once focused narrowly on inflation and interest rates are now speaking openly about politics, social change and long-term structural forces.

Among the clearest examples is the Bank of England's warning that two powerful trends — climate policy and the rise of populism — are now acting as persistent drags on economic growth.

This is not an ideological intervention. It is a sober assessment of the constraints facing advanced economies, particularly the UK and Europe, as they navigate a period of low productivity, fragile public finances and political volatility.

The Economic Cost of the Climate Transition

The Bank of England does not dispute the necessity of climate action. The risks posed by climate change to long-term economic stability are real and well documented. However, the Bank has been explicit about a less comfortable truth: the transition to net zero imposes economic costs before it delivers benefits.

In the short to medium term, climate policies tend to reduce growth by raising costs and diverting resources. Governments are forcing the early retirement of productive assets — power stations, industrial equipment, vehicle fleets — and replacing them before the end of their natural economic life. From an accounting perspective, this is investment. From a growth perspective, it often merely preserves existing output rather than expanding it.

Capital that might otherwise have gone into productivity-enhancing innovation is instead used to meet regulatory requirements or to duplicate capacity in a greener form. The result is an economy that looks busy but grows slowly.

Energy Prices, Inflation and Competitiveness

One of the Bank’s central concerns is energy. Decarbonisation has increased reliance on energy sources that require heavy upfront investment and, in some cases, greater price volatility. Until renewable systems are fully scaled and supported by adequate storage and grid infrastructure, energy markets remain vulnerable.

Higher energy costs feed directly into inflation. They raise household bills, squeeze real wages and increase costs for businesses. For energy-intensive industries, this undermines international competitiveness and discourages investment. In countries like the UK, where productivity growth was already weak before the climate transition began, this effect is particularly pronounced.

The Bank’s warning is not that green energy is undesirable, but that poorly sequenced or overly rigid policies can impose real economic penalties if the transition is not managed carefully.

Productivity: The Missing Link

At the heart of the Bank of England’s concern is productivity. Long-term growth in living standards depends on producing more value per hour worked. Yet many forms of climate investment do not automatically raise productivity.

Installing greener systems often allows firms to comply with regulation while maintaining output, rather than producing more with less. The benefits — cleaner air, reduced emissions, long-term resilience — are real but diffuse, while the costs are immediate and concentrated.

This helps explain why economies can experience high levels of investment yet still struggle to generate strong growth or rising wages.

Populism and the Erosion of Economic Stability

Alongside climate policy, the Bank has highlighted a second drag on growth: the rise of populism.

From an economic perspective, populism is not defined by left or right ideology, but by a tendency to favour short-term political gains over long-term stability. It often involves hostility to independent institutions, pressure for unfunded spending, resistance to painful reforms, and sudden policy reversals.

For businesses and investors, this creates uncertainty. Investment decisions depend on predictable tax regimes, stable regulation and credible economic management. When governments appear vulnerable to sudden shifts driven by electoral pressure, confidence weakens and investment is delayed or cancelled.

Central banks are particularly concerned about attacks on their independence. Price stability — a prerequisite for sustainable growth — depends on monetary policy being insulated from short-term political demands.

When Climate Policy and Populism Collide

The most damaging effect arises when climate policy and populism interact.

The transition to net zero requires long-term planning, policy consistency and public trust. Populist politics, by contrast, tends to punish visible short-term costs such as higher bills or taxes. This creates a temptation for governments to oscillate between ambitious climate commitments and political retreat.

The result can be incoherent policy: enough regulation to raise costs, but insufficient consistency to deliver efficiency or innovation. From the Bank of England’s perspective, this is the worst of both worlds — slower growth without the compensating gains of a well-managed transition.

Why Central Banks Are Speaking Out

Central banks are not known for straying into political territory. The fact that the Bank of England is doing so reflects a growing sense that traditional economic tools are no longer sufficient.

With public debt high, fiscal space limited and productivity weak, mistakes are harder to correct. Inflation shocks, political instability and policy uncertainty now carry greater risks than in the past.

By raising concerns about climate policy design and populism, the Bank is attempting to highlight trade-offs that are often obscured in public debate.

A Future of Constrained Growth

The Bank of England’s message is ultimately a warning about realism. The era of cheap energy, benign globalisation and steady productivity growth has ended. What replaces it is a world of difficult transitions, political fragmentation and tighter economic constraints.

This does not mean growth is impossible. But it does mean that growth will be harder to achieve and easier to derail. Policymakers face choices that involve genuine trade-offs, not cost-free solutions.

Conclusion

The Bank of England’s concern is not ideological, but structural. Climate change must be addressed, and democratic politics will always involve contestation. But if climate policy raises costs without boosting productivity, and if populism undermines policy stability, the result is an economy stuck in low gear.

The challenge for governments is not simply to promise growth, but to design policies that acknowledge economic reality — managing transitions carefully, preserving institutional credibility, and being honest with voters about the costs involved.

In an era of constrained growth, economic honesty may prove as important as economic ambition.