After a summer of extreme heat, wildfires and floods in Europe, the costs of climate change have become increasingly stark. A new report by the European Central Bank has reaffirmed the severe consequences of delays or inaction on climate change. The Bank’s first economywide climate stress test, is part of a major effort by policymakers to support the transition to a net-zero carbon world.
FROM THE ECB REPORT:
“The results of the ECB’s economy-wide climate stress test first show that there are clear benefits in acting early. The short-term costs of the transition pale in comparison to the costs of unfettered climate change in the medium to long term.
The early adoption of policies to drive the transition to a zero-carbon economy also brings benefits in terms of investing in and rolling out more efficient technologies … Additionally, the results show that if policies to transition towards a greener economy are not introduced, physical risks become increasingly higher over time: they will increase non-linearly, and due to the irreversible nature of climate change such an increase will continue over time … It is thus of foremost importance to transition early on and gradually, to mitigate the costs of both the green transition and the future impact of natural disasters. “
The results also show that for corporates and banks most exposed to climate risks, the impact is potentially very significant, especially in the absence of further mitigating policies. If climate risks are not reduced, the costs to companies arising from extreme weather events would rise substantially, and significantly and negatively affect their creditworthiness.
Climate change thus represents a major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors and, more importantly, in specific geographical areas. Finally, the anticipated impact on banks in terms of losses would mostly be driven by physical risk and would potentially be severe over the next 30 years.”
The European Central Bank has made climate change one of its central focuses, which will influence monetary policy and financial regulation. European Union countries have already agreed to cut their collective greenhouse gas emissions by 55 percent from 1990 levels by 2030, on a path to be carbon neutral by 2050. In July, the European Central Bank justified incorporating climate change into its monetary policy framework by arguing that “climate change and the transition towards a more sustainable economy affect the outlook for price stability.”