Climate change is a big issue for central banks

Climate change is transforming the economy and financial system

Erik Ens
Erik Ens
Adrian Guerin
Adrian Guerin

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Climate change is transforming the economy and financial system. The Bank of Canada is working to understand how.

The environment is going through fundamental changes. Scientists say carbon dioxide is at record-high levels in the Earth’s atmosphere and is warming our planet. These changes to the climate, and the steps people take to limit them, are altering the way Canadians work and live.

Too much carbon dioxide is in the air because of what economists call “externalities.”

Climate change is reshaping the Canadian economy

Adapting to hotter, less predictable weather

Severe weather, like wildfires and floods, can disrupt the day-to-day functioning of the economy. Some areas where people live today may not be livable in the future. Destruction of things that help make the economy work—like roads, rail lines, buildings and machines—could slow economic growth.

To adapt to climate change, Canadians may also need to buy more home insurance or spend more to protect their homes from floods.

Changes to weather can push up the prices for everyday things. These prices can also become less predictable. For example, as weather patterns change, farmers may struggle to produce consistent crops every year. So, the amount you pay for groceries may be higher and change more often.

Moving to a low-carbon world

Erik Ens explains how changes in consumer tastes, and policies that make pollution more expensive, will impact our economy.

Global actions will have an impact at home

Canada relies heavily on trade and exports of natural resources like oil. A shift to a low-carbon world would reduce demand for some of the natural resources that Canada exports.

The financial system will need to adapt as well

More severe weather events like flooding, hurricanes and tornadoes can damage homes and businesses. This results in higher costs for home and business owners, and insurance companies.

In some cases, insurance coverage may no longer be available, and property and business values could fall. Banks that lent money to those affected may not be paid back, and investors may also lose money. If these losses are large or sudden enough, they could make the financial system less safe.

Investment decisions are changing

More investors—from individual Canadians to big companies like those that manage pension funds—are looking at environmental factors when making investment decisions.

This shift in investor preferences can help in the move to a low-carbon economy, but investments in carbon-intensive industries may become less attractive.

Many businesses are choosing to report on their own carbon footprint and the risks they face from climate change. This transparency can help businesses better manage these risks and provide comfort to investors. Businesses that aren’t as transparent may be viewed as higher risk.

Why are central banks thinking about climate change?

The Bank of Canada is ramping up efforts to better understand climate change because of its important effects on the economy and prices (inflation). The Bank also needs to understand the risks from climate change on the financial system as part of efforts to help keep it safe for Canadians.

Our economists are working on some of the big questions on how climate change will affect the economy.

Central banks cannot solve climate change

Central banks do not set environmental policy; that’s the job of governments. But central banks are in a unique position to improve society’s understanding of the economic and financial system impacts of climate change and the policies to address it. This can help investors, regulators and everyday Canadians make informed decisions.

We all need to contribute

We at the Bank of Canada are no exception. We have put in place a multi‑year strategy to reduce waste and start measuring—and shrinking—our carbon footprint.

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