If the pace of transition to a low-carbon economy in Ireland is too slow, it will pose macroeconomic and financial stability risks as sharper adjustments will be necessary, the Central Bank governor Philip Lane has warned.
The financial system had a central role in managing climate risks and financing decarbonisation, but regulatory policies and supervisory practices must also play their part, he said in Galway on Tuesday.
Outlining challenges facing the Irish financial system posed by climate change, Mr Lane said the necessary transition to a low-carbon economy – supported by a phased schedule of increasing carbon taxes – required the funding of considerable investment by households, firms and the Government.
An increase in frequency of severe weather events had implications for macroeconomic outcomes, asset prices, house prices, credit risks and the cost and coverage of insurance contracts, he said.
“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,” he added.
Delivering the Monsignor Pádraig de Brún Memorial Lecture at NUI Galway, he noted financial firms' strategic plans would 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."
Regulatory policies and supervisory practices must address the financing of related shifts in the structure of the economy and investments, Mr Lane said. “The risks of climate change call for ongoing monitoring of climate risks, together with the development of climate-driven scenario analyses and stress tests.”
Households would face several challenges over coming years including the costs of retrofitting homes to reduce energy consumption; the prospect of more expensive and/or more curtailed insurance policies to the extent that there was an increased frequency of severe weather events; and changes in household transportation options.
On the Central Bank’s role, he said: “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.”
Climate resilience was an integral component to the overall resilience of the financial system and the economy, he pointed out. Much of what was required could 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”.
“Carbon taxes will have a central role in guiding the energy transition by providing the economic incentive to switch from high-carbon to low- or zero-carbon technologies and products,” Mr Lane said.
A phased increase from the current €20 per tonne to €80 per tonne by 2030 had been recommended by the Climate Change Advisory Council, but already some countries had carbon taxes at the upper end or even in excess of this range – the Swedish carbon tax rate is €112; in Switzerland it is €81; and €62 in Finland.
