Slow transition to a low-carbon economy poses macroeconomic and financial stability risks – Governor Philip R. Lane

• The financial system has a central role in managing climate risks and financing the carbon transition.
• If the pace of transition is too slow, a sharper adjustment will be ultimately required, posing macroeconomic and financial stability risks.
• Regulatory policies and supervisory practices must address the risks of climate change.

Governor of the Central Bank of Ireland, Philip R. Lane, addressed the 2019 Monsignor Pádraig de Brún Memorial Lecture in NUI Galway today, presenting his Economic Letter, Climate Change and the Irish Financial System | pdf 834 KB.

He outlined the challenges posed by climate change for the Irish financial system, noting that the necessary transition to a low-carbon economy (supported by a phased schedule of increasing carbon taxes) requires the funding of considerable investment by households, firms and the government. He added that if the pace of transition is too slow, a sharper adjustment will be ultimately required, posing macroeconomic and financial stability risks.

“The economy-wide and societal challenges posed by climate change mean that it is inevitable that the financial system has a central role in managing climate risks and financing the carbon transition. Accordingly, the strategic plans of financial firms will have to address climate change. Equally, as the guardian of financial stability and the financial regulators, central banks have a leadership role in ensuring that climate change is a strategic priority for the financial system as a whole”, he said.

He added that regulatory policies and supervisory practices must address the financing of the related shifts in the structure of the economy and investments. The risks of climate change call for ongoing monitoring of climate risks, together with the development of climate-driven scenario analyses and stress tests.

He noted that households will face several challenges over the coming years including the costs of retrofitting homes in order to reduce energy consumption; the prospect of more expensive and/or more curtailed insurance policies to the extent that there is an increased frequency of severe weather events; and changes in household transportation options.

In relation to the Central Bank, he said that as the financial regulator, we have extensive responsibilities in guiding the adaptation of the financial system. “We plan to incorporate the carbon transition into our macroeconomic and financial stability assessments. Over time, the carbon transition will be an influential factor in shaping macroeconomic outcomes”, he said.

He concluded that climate resilience is an integral component to the overall resilience of the financial system and the economy. Much of what is required can only be achieved through engagement with households, firms, government and financial intermediaries, in order to influence the design of appropriate policies and the financial decisions of all affected sectors, he said.

Governor Lane's presentation to NUI Galway | pdf 834 KB