Climate change concerning to Bank of Canada
Governor Poloz says risks increase for lending as assets are impacted
Bank of Canada governor Stephen Poloz wasn’t asked about climate change risks at a discussion about economic change and emerging risks on Thursday, so he brought them up himself.
“It’s about the transition risk, right, as everyone’s portfolio and all their lending practices kind of converge on a different climate trend line, that that could have significant consequences for financial systems,” he said. “So we need to model that and do stress testing and so on, and so we’re building new tools for that.” His comments came the same week the Bank of Canada outlined its research priorities on the potential impacts of climate change, including physical risks of intensifying weather, the financial risks of stranded assets, and wider risks to the system of increased volatility.
The report by Miguel Molico, senior research director at the bank’s Financial Stability Department, notes that carbonintensive sectors like oil and gas could be hurt by significant changes in pricing in a transition away from a carbon economy.
“Maintaining the warming below 2.0 degrees Celsius implies that some of the existing fossil fuel reserves will become stranded assets,” he wrote.
“These transition risks are of particular significance for Canada given its endowment of carbon-intensive commodities, the current importance of some of these carbon-intensive sectors for the Canadian economy, and the energy needs for cooling and heating.”
More frequent or severe extreme weather events, or an abrupt transition to a low-carbon economy could have significant impacts on the Canadian financial system, with potential systemic consequences, he said.
Molico said the physical effects of climate change could reduce global annual GDP by1.5 to as much as 23 per cent by end of the century.