What Does a Central Banker Know About Climate Change?

A message that surprised.

Photographer: Simon Dawson/Bloomberg

Bank of England Governor Mark Carney startled some people this week, when he gave a speech drawing attention to the risks that climate change poses to financial stability. This isn't a connection central-bank governors often make.

More's the pity, because the connection is real.

Climate change implicates assets worth billions if not trillions of dollars. If governments fail to address the problem effectively, economic losses will steadily mount. For instance, owners of mortgaged houses in danger of flooding will face increasing financial stress; so will their lenders and insurers.

If, on the other hand, stronger action is taken to curb such risks, the value of fossil-fuel resources will fall -- imposing a different kind of financial stress on energy companies and their creditors.

Climate Change

The strains of adjusting to a low-carbon economy can't be avoided altogether, but their severity will depend on how governments manage the problem. For the sake of financial stability, the most dangerous course is the one we're on: Delay curbing greenhouse-gas emissions until the costs of climate change are impossible to deny, then shift abruptly to strong controls.

This way, you get the worst of all worlds: the costs of unabated global warming plus needlessly expensive emergency action, including the risk of severe financial instability.

Suppose that a too-long-delayed effort to reduce emissions takes financial markets by surprise. What might happen? A fossil-fuel budget aimed at keeping the rise in temperature to 2 degrees Celsius above pre-industrial levels would amount to between one-fifth and one-third of the world's proven reserves of oil, gas and coal. If such a budget had to be imposed, without breakthroughs in carbon-capture technology, the remaining fossil-fuel reserves would suddenly be worthless -- stranded assets.

U.K. investors, Carney said, would be greatly exposed: "Nineteen percent of FTSE 100 companies are in natural resource and extraction sectors; and a further 11 percent by value are in power utilities, chemicals, construction and industrial goods sectors." In this way, an environmental emergency would also be a financial catastrophe.

It's yet one more argument for acting gradually and methodically to address climate change -- rather than wait until the problem becomes impossible to manage. And this one you can take to the bank.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.