contribute to climate Anna Breman policy Deputy Governor 3 March - PowerPoint PPT Presentation

How the Riksbank can contribute to climate Anna Breman policy Deputy Governor 3 March 2020

Robur et Securitas – Strength and Security

Carbon dioxide concentrations in the atmosphere over the last 800,000 years Parts per million (ppm) 450 450 Carbon dioxide in the atmosphere 2019: 408.55 400 400 350 350 300 300 250 250 200 200 150 150 800 738 685 597 547 470 355 260 164 58 9 0 Thousands of years Carbon dioxide in the atmosphere over the last 800,000 years. Year Source: Lüthi, D., et al., 2008 supplied by NOAA NCEI Paleoclimatology zero represents 2019. Program

The climate and its effect on the economy and the financial system Climate-related risks can affect monetary policy – three different scenarios What can the Riksbank do to contribute to more sustainable development

By how much will emissions increase? – two scenarios Parts per million (ppm) 1400 1400 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 0 1950 1970 1990 2010 2030 2050 2070 2090 Historical emissions Continued emissions (RCP 8.5) Reduced emissions (RCP 4.5) The concentration of carbon-equivalent greenhouse gases in the Source: RCP Database (Version 2.0.5) atmosphere in two of the IPCC’s scenarios, RCP 8.5 (continued carbon emissions) and RCP 4.5 (reduced emissions).

Substantial uncertainty over the effects of climate change TEMPERATURE PRECIPITATION SEA LEVEL Change in relation to the Change in relation to the Change in relation to the mean value (1961-1990), mean value mean value (1986-2005), degrees C (1961-1990), % cm +7.9 +41.4 +66.4 +5.9 +27.1 +42.4 +4 +17 +21.4 +3.8 +39.1 +39.4 +3.1 +18.5 +21.4 +2.3 +8.2 +4.4 The graph shows the change in temperature, precipitation and sea Sources: SMHI scenario data and SMHI Klimatologi no. 41. level in the two IPCC scenarios. The figures illustrate the maximum, minimum and mean values.

Climate change affects the economy PHYSICAL RISK COMPANIES, FINANCIAL  Gradual global warming AGRICULTURE AND INSTITUTIONS  Extreme weather events HOUSEHOLDS Lower TRANSITION RISK productivity  Tighter insurance requirements  Adaptation to less fossil- Falling asset based economy prices  Investment losses  Climate taxes  Tougher regulation Lower profits  Credit losses  Changed consumption patterns  Increased risk weights

Adaptation to a less fossil-based economy is already under way Index 1 January 2008=100 250 250 200 200 150 150 100 100 50 50 0 0 08 10 12 14 16 18 20 S&P 500 Dow Jones Oil & Gas Dow Jones Coal Source: Macrobond

Climate policy should be designed to avoid extreme outcomes Climate system particularly complex – substantial uncertainty and risk for extreme outcomes with huge costs Decisions shrouded in uncertainty – “Good decisions on average” or “avoid really bad outcomes” Insurance perspective – we should insure ourselves so that we avoid and reduce the consequences of extreme outcomes

The climate and its effect on the economy and the financial system Climate-related risks can affect monetary policy – three different scenarios What can the Riksbank do to contribute to more sustainable development

Climate change can affect monetary policy – three scenarios A temporary supply shock A slow structural change A severe economic crisis

The monetary policy toolbox is not exhausted Liquidity • Loans to financial institutions to provide liquidity in a crisis support Policy rate • But the interest rate is close to its effective lower bound • Purchase of housing and corporate bonds Other • “Forward guidance” • Loans to companies via banks measures • Foreign exchange interventions

Purchase of government bonds swells the Riksbank’s balance sheet SEK billion 1 000 Liabilities Assets 900 Capital 800 SEK portfolio 700 600 Market 500 Other assets operations Gold 400 300 Other liabilities Notes and coins FX reserve 200 100 FX debt 0 31 December 2019 Source: The Riksbank

The climate and its effect on the economy and the financial system Climate-related risks can affect monetary policy – three different scenarios What can the Riksbank do to contribute to more sustainable development

The Riksbank’s role in climate work Research and analysis Financial sector regulation The Riksbank’s balance sheet

Minor losses with a high carbon tax Per cent 25 25 20 20 15 15 10 10 5 5 0 0 2010 2050 2090 2130 2170 High tax when a low tax is correct Low tax when a high tax is correct Source: Hassler, Krusell and Olovsson (2018)

The Riksbank’s role in climate work Research and analysis Financial sector regulation The Riksbank’s balance sheet

How sustainable are the foreign exchange reserves? Emissions as a share of GDP 0,5 0,5 In the foreign exchange reserves 0,4 0,4 Potential holdings 0,3 0,3 0,2 0,2 0,1 0,1 0 0 Direct greenhouse gas emissions, excluding uptake and emission of Sources: UNFCCC, OEDCD and Climate Watch. greenhouse gases from land use, GHG (kt CO 2 e)/GDP (USD million). .

Scope to broaden bond purchases Outstanding volume of bonds issues in SEK millions 4000 4000 3500 3500 3000 3000 2500 2500 2000 2000 1500 1500 1000 1000 500 500 0 0 2013 2014 2015 2016 2017 2018 2019 Housing bonds Government bonds Corporate bonds Municipal bonds Sources: SCB, Kommuninvest, Covered Bond Label and the Riksbank

Central banks need to take the climate issue seriously • Independence of the Riksbank From here strength • Focus on both business cycle and structural changes and security • The Riksbank is taking the climate issue seriously Global price on carbon dioxide is the • Central banks can contribute the means within their mandates highest priority • Research and analysis The Riksbank’s • Cooperation with other authorities and international networks contribution • Continue work to review our assets

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