Climate Change Poses Financial Stability Risk – RBA

Financial stability could be put at risk from the physical impact of climate change and “an abrupt disorderly transition” to a low-carbon economy, according to RBA deputy governor Guy Debelle.

The RBA (Reserve Bank of Australia) has warned climate change is likely to cause economic shocks and threaten Australia’s financial stability.

In a speech to the Centre for Policy Development in Sydney, RBA deputy governor Guy Debelle said challenges for financial stability may arise from both the physical impact of climate change and the transition to new policies that interact with the new climate realities.

“Today, climate change presents significant risks and opportunities for a broader part of the economy than agriculture, though the impact on agriculture continues to be significant.”

In particular, financial stability could be put at risk if businesses remained unaware of unanticipated insurance payouts, pollution-driven reputational damage, legal liability and regulatory changes that could cause valuable assets to become uneconomic, he said.

“All of these consequences could precipitate sharp adjustments in asset prices, which would have consequences for financial stability.”

Debelle was speaking not only of the risk of more extreme weather, but also of how Australia planned its transition to cleaner energy sources.

“The transition path to a less carbon-intensive world is clearly quite different depending on whether it is managed as a gradual process or is abrupt,” he said. An “orderly transition to a low-carbon economy” would be better for financial stability than “an abrupt disorderly transition”.

According to Debelle, the RBA is speaking about the issue because of the size and long-term nature of the impact climate change would have on the economy, and the implications for monetary policy.

He endorsed comments by APRA (Australian Prudential Regulation Authority) executive board member Geoff Summerhayes, who in January warned that tackling climate change had become a “financial necessity”.

While the RBA is not responsible for developing climate policy, it has a role to play in ensuring there is adequate data to make the decisions it needs to, Debelle said.

The RBA is consulting with businesses and climate modellers to inform its monetary policy decision-making. Last year, it joined the Network for Greening the Financial System, a group of central banks that are examining climate issues.

“The challenges we have to address are to take the outcomes from climate modelling and map them into our economic modelling.”

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