A new report from an international banking organisation (stick with me, here) suggests climate change could cause of the world’s next great economic crisis, warning that the planet’s response to rising temperatures could have “catastrophic and irreversible impacts that would make quantifying financial damages impossible.”
The Bank for International Settlements (BIS), which includes the Reserve Bank of Australia as a member, has issued a report on what it calls potential “green swan” events – that is, drastic impacts on the world economy brought about by climate change.
While the report focuses on the obvious and not-so-obvious outcome of unchecked global warming, it also suggests things could go pear-shaped even if we killed carbon-belching industries overnight.
“The immediate and system-wide transition required to fight climate change could have far-reaching effects potentially affecting every single agent in the economy and every single asset price,” said François Villeroy de Galhau, governor of the Bank of France.
Consider this: if the planet whacks stiff carbon prices and enforces strict emission reduction laws, the value of the fossil fuel industry is likely to freefall.
Without a clear international pathway for transition, reserve banks – and by extension, the taxpayer –could be forced to cover those economic losses. The BIS compares that potential “green swan” event to the 2008 financial crisis:
The 2007–08 Great Financial Crisis has shown how a shock in one sector, subprime mortgages, can result in multiple shocks in different regions and sectors with little direct exposure to subprimes. In this respect, abrupt shifts in market sentiment related to climate change could affect all players, including those who were hedged against specific climate-related risks.
Not great. But the potential disruptions caused by any transition are still infinitely preferable to the alternative, said BIS General Manager Agustín Carstens.
“Despite the high level of uncertainty, the best scientific advice today suggests that action to mitigate and adapt to climate change is needed,” he said.
After all, changes to the natural environment will abruptly change the value of resources in the near future anyway.
So, what’s the best way forward? If you’re the BIS, it looks like large financial institutions enacting “scenario-based analysis and forward-looking approaches” to assess which industries could be rumbled by the transition to lower carbon emissions.
Similarly, BIS says investors could remove their funds from companies which continue to churn pollutants into the atmosphere, enacting what the organisation calls a “shadow price” for carbon emissions.
Primarily, the solution rests with national governments enacting monumental changes themselves:
The prime responsibility for ensuring a successful low-carbon transition rests with other branches of government, and insufficient action on their part puts central banks at risk of no longer being able to deliver on their mandates of financial (and price) stability.
Anyway, read the report here.