By Neil Irwin, The New York Times, September 30, 2015
A new speech about climate change is fascinating both for what it says and who said it.
Mark Carney, the governor of the Bank of England, declared that the warming climate presented major risks for the global economy and global financial stability, and that businesses and regulators needed to move more quickly to try to contain the potential economic damage even though it may seem uncertain and far off.
His warning, delivered in a 4,400-word speech with ample footnotes on Tuesday, is the latest example of how climate change has moved beyond theoretical scientific debates to the start of practical planning for safeguarding the economy and business.
“We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors — imposing a cost on future generations that the current generation has no direct incentive to fix,” he said. “In other words, once climate change becomes a defining issue for financial stability, it may already be too late.”
Mr. Carney calls the economic challenges around climate the “tragedy of the horizon,” in contrast to the long-noted economic phenomenon of the “tragedy of the commons.”
That is, the costs of a warming climate come on a time scale and with an uncertainty that go beyond the usual multiyear business cycle, beyond political cycles of presidential and parliamentary elections, or as he puts it, beyond “the horizon of technocratic authorities, like central banks, who are bound by their mandates.”
It might seem odd for a central banker to be talking about a long-term problem of global climate, all the more so when the global economy is looking rather shaky. After all, the job is typically to worry about price inflation and the banking system.
But if you back up and define a central banker’s job a little more broadly — to worrying about the economy and the stability of the financial system writ large — it quickly becomes clear why climate matters.
Consider that a housing bubble largely concentrated in a handful of Sun Belt American states, Spain and Ireland set in motion events that eight years ago caused a financial crisis from which the world economy has still not fully healed. It’s easy to imagine how the effects of a shifting climate could similarly ripple through both the financial system and the real economy in ways that are impossible to predict with any precision today.
Global insurers are already facing a higher frequency of large, expensive disasters from extreme weather, and in the future could face untold liabilities as the losers from a warming planet try to extract compensation from the (insured) companies that profited from fossil fuel production. It was no coincidence that Mr. Carney delivered his speech at the three-century-old insurer Lloyd’s of London.
Those energy extraction industries, which include many of the planet’s biggest companies, could one day face existential risk. If global governments get more aggressive about restricting carbon emissions, it could mean that billions of investment in oil and gas extraction will be rendered useless and undermine both some of the most widely held investments and the government finances of oil-producing regions.
More subtly, expensive efforts at remediation — spending to try to contain the damage of climate change — could crowd out other forms of investment. Think of it this way: Sorry, we can’t afford to repair this bridge in Kentucky because interest rates are too high because Florida is borrowing so much money to try to keep Miami inhabitable.
There is no certainty that any of these threats will materialize on a large enough scale to carry meaningful economic or financial risk. But any of them, or others that are harder to imagine, could well do so.
A British official like Mr. Carney has particular incentive to worry about these matters: London is a key center for managers of global financial risk, with its insurers and other financial services. And he notes that 19 percent of the British stock market value is in energy extraction.
But while each country might have its own mix of economic and financial risks from climate, this new speech from the Bank of England is a signal that others entrusted with managing economic risk might want these risks on their radar, even if the tools to combat them today are limited.
Mr. Carney isn’t the first financial policy maker to discuss climate risks; the former American Treasury secretaries Bob Rubin and Hank Paulson have been vocal, for example. But it is fascinating to have a current policy maker, who has plenty of nearer-term problems on his plate, deliver a sweeping speech on something that at first glance might seem outside his remit.
There’s little doubt that other large and powerful institutions, whether banks, insurers, industrial giants or regulatory agencies, will have to deal with these issues. Think of Mr. Carney’s speech as a call to begin that work sooner, rather than later.