As new study accuses IEA of underestimating level of disruption from clean power, Bank of England governor again stresses systemic risks presented by climate change
The governor of the Bank of England has once again warned that climate change could have a "catastrophic impact" on the global financial system.
Speaking at a summit of central bank governors in Amsterdam, Mark Carney reiterated previous warnings that the global financial system could be at risk from both physical climate impacts and a 'carbon bubble' where efforts to decarbonise leave carbon intensive assets stranded.
He said markets could experience a "climate Minsky moment", referencing the work of economist Hyman Minsky who has studied how banks failed to predict the 2008 financial crisis.
Carney again called for improved disclosure of climate risks from listed firms to help ensure investors can respond appropriately.
"Given the uncertainties around climate, not everyone will agree on the timing or scale of the adjustments required," he said. "[But] the right information allows sceptics and evangelists alike to back their convictions with their capital."
In his role as chair of the international Financial Stability Board Carney was one of the key drivers in convening the Taskforce of Climate-related Financial Disclosures (TCFD), which last year published wide-ranging recommendations calling on listed firms to report on climate risks and undertake scenario analysis to assess how they would be impacted by various decarbonisation paths.
Over 230 companies have now signed up to report in line with the TCFD's guidelines, while a raft of leading investors with trillions of dollars of assets under management have said they will step up pressure on companies to adopt the recommendations.
Carney stressed companies could benefit from the low carbon transition if they beefed up investment in low carbon assets, but warned investment in such projects needed to financed at around quadruple the current rate.
Meanwhile, François Villeroy de Galhau, head of the French central bank, told the FT he wanted to see compulsory disclosure of climate risks from banks and insurers, as well as carbon stress tests for all financial institutions, including central banks, and potentially penalties for those investing in the highest carbon assets.
"What we will need are forward-looking stress tests assessing the comprehensive interaction between climate change and assets and liabilities," he told the paper. "So this is our first technical challenge: how can we elaborate on the link between climate scenarios and economic scenarios?"
Carney said the Bank of England would consider requiring carbon stress tests of banks once its review of the sector's exposure to climate-related risk is completed later this year, although he added that it would take several years for such a move to come into effect.
The summit came in the same week as a new study from NGO Oil Change International warned the 'carbon bubble' could be being amplified by the International Energy Agency's (IEA) consistent failure to accurately predict the rapid expansion of the renewables sector and the influence its projections wield over governments and policymakers.
The study detailed how the agency's projections are consistently incompatible with the goals of the Paris Agreement. It argues that under the IEA's 'new policy scenario' the world's carbon budget for 1.5C would be exhausted by 2022, and for 2C by 2034.
"The IEA provides an energy roadmap that is supposed to lead us to safety, but in fact it takes us over the cliff," said Greg Muttitt, research director at Oil Change International. "Any government or financial institution that uses these scenarios as a basis for investments in oil and gas is getting seriously bad information. It's shocking how far off the Paris agreement they are."
The IEA has argued its main scenarios are based on existing policies and it has repeatedly warned bolder policies are required to put the energy sector on a trajectory that is compatible with the Paris Agreement. Last month it warned global emissions from energy rose again after a three year hiatus, further highlighting how urgent action is needed to curb emissions.
But observers have long warned policy makers and investors are making decisions based on central scenarios from the IEA and oil majors that would result in the Paris Agreement goals being missed, raising fears carbon intensive assets could end up stranded if governments accelerate decarbonisation efforts.
Separately, a group of leading business associations and NGOs last week wrote to European Commission President Jean-Claude Juncker to call for the EU budget to be made "fully compatible with the Paris Agreement and the Sustainable Development goals".
The joint open letter comes ahead of the publication next month of the European Commission's spending priorities for the next EU budget period, which starts in 2020.
The letter calls on President Juncker to significantly increase the current 20 per cent climate action share of the EU budget, to climate proof the entire budget by excluding fossil fuels and to ensure EU funds bolster Member States' efforts to achieve the bloc's 2030 and 2050 climate objectives.
"It is clear for us that the future EU budget must live up to the huge challenges posed by climate change," said Wendel Trio, director of the Climate Action Network (CAN) Europe group of NGOs. "EU institutions cannot claim that they are doing everything they can to comply with the Paris Agreement whilst continuing to fund fossil fuels.
"At the same time, the EU budget has a huge untapped potential to catalyse the clean energy and mobility transition. A credible EU budget must address the common and long term challenges Europeans are faced with: climate change is one of them."
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