As the price of living rises with inflation following the pandemic, the first worry of lower-income families might be how to afford their shopping or petrol. The second worry might be how to put away money for savings. Monetary values such as costs of living, potential profits and wages, or capital assets tell us much about the well-being of society. Even health loss can be appraised by looking at the costs of insurance and treatment. Therefore, considering the physical risks of climate change is vital to achieving financial stability. This article hopes to explore how climate change threatens the economy and the financial cost of climate change as a whole.
The Impact of Climate Change on our lives and our banks
Managing climate risks is not just a matter of preparing for disasters but also understanding how to better integrate resilience into the built environment, including the risk to the financial system. Less attention has been paid to the physical risks of climate change which so far have been explored only using small-scale models. As physical disasters increase, banks are more willing to provide credit for green projects and a higher demand for green bonds by households. Significant responsibility is on central banks as they determine the base interest rate, provide liquidity to the commercial banks and purchase government securities and corporate bonds.
In 2016, fifteen weather and climate disaster events caused $1 billion or more in overall economic losses. Finally, the finance sector is waking up to climate change. Recent experience shows extreme weather events can have devastating financial and human consequences. The UNFCCC's financial mechanism, the green climate fund, achieved its goals when it received over $10 billion in pledges from the Paris Climate Agreement and began approving investments in 2015. As of July 2016, the GCF has approved more than $225 million in funding and has accredited thirty-three agencies, including several national-level institutions.
Governments collect taxes and can implement bailout programmes if there are financial problems in the banking sector. Higher green investment can reduce the physical risks to the financial system. Taking an interest in ensuring the financial and insurance sectors integrate climate considerations will mean there is less of a drain on fiscal budgets in times of disaster. This promotes a good sense of risk management.
Ways in which climate change will make our lives more expensive
Extreme weather such as floods, storms, droughts, and fires have always occurred, but their frequency is likely to increase with climate change. What does this mean in terms of costs? Research on the costs of climate change can be divided into two parts:
The estimated costs to transition to a low-carbon economy.
The costs expected from the impacts of climate change, such as climate-related extreme weather events, or effects on supply chains, employment, or other factors critical for economic activity.
The transition to a net carbon world may cost as much as $1trillion per year by 2030. In particular is the concern that with a growing population, more investments will be needed in infrastructure, energy-related investments and efficient transport. Climate change can impact the financial returns of investments and corporations.
For example, during the Thai floods, Honda, which had significant manufacturing plants in Thailand, lost 150,000 cars when many of its factories around the country. The physical impacts of climate change and the cost can be difficult to predict. However, these impacts can be mentioned by the overall vulnerability of each community and population. The World Economic Forum's Global Risks Report (released in 2016) proved that the failure to adapt to climate change rose to the top of the list of risks most concerning to survey respondents.
How will the cost of Climate change impact developing countries?
A significant concern for the financial cost of climate change is that it will hit developing countries the hardest. Eastern Africa is predicted to get wetter, but much of southern Africa could get drier and hotter. With the vast size of the continent, the effects of climate change will be on both ends of the spectrum for extreme weather conditions. The role of the government is central in providing the information, incentives, and economic environments to facilitate such changes.
Regarding mitigation, there is a need to design emissions-trading frameworks that support greater African participation than at present, including land-use change. Mitigation undertaken elsewhere will have a major impact on Africa, both positive (e.g. new technologies) and negative (e.g. commodity price changes arising from biofuel policies). Agriculture is the largest single economic activity in Africa, accounting for around 60 per cent of employment and, in some countries, more than 50 per cent of GDP.
Summary
The fundamental changes coming to our ecosystem in the following decades are likely to have severe implications for the financial system's stability. First, climate change is expected to increase corporate loan default rates, which could harm the banking system's stability. Second, the damages caused by climate change can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Third, environmental instability will affect credit expansion, exacerbating the negative impact of climate change on economic activity.
It is no longer sufficient to categorise climate risk as merely environmental and ignore the impacts it may have on other types of risks to an economy to the returns on investments or the profits of a business.
In the long term, world mitigation that is effective in stabilising atmospheric levels of CO2 will be valuable to Africa, as it will for the rest of the world. The economic and financial risks of climate change appear increasingly likely. The greatest opportunity arises from clean energy investments. With indicators of climate change already appearing, the need for investments will also create business opportunities.
A green corporate QE programme could reduce the risks imposed on the financial system by climate change. However, these programmes are not enough alone. Many other environmental policies need to be implemented in conjunction with a green QE programme to keep the atmospheric temperature close to 2 degrees and prevent climate-induced financial instability. Though the Paris agreement and COP26 were historic, the real work is still to come. Governments, businesses, investors, and financial institutions across the entire financial services sector will need to collaborate to align the public interest in addressing climate change much more closely with financial incentives.
REFERENCES
Collier. P, G. Conway and T. Venables, 'Climate Change and Africa', Oxford Review of Economic Policy, 24 (2008) 337-353 <*grn019_LR (psu.edu)>
Dafermos. Y, M. Nikolaidi and G. Galanis, ‘Climate Change, Financial Stability and Monetary Policy’, Ecological Economics, 152 (2018) 219-234
Miller. A.S and S.A.Swann, 'Climate Change and the Financial Sector: A Time of Risk and Opportunity', The Georgetown Envtl.Law Review, 29:69 (2017) 69-110
Comentários