Name: Why climate change is a ticking economic time bomb (and what we can do about it) | CNBC Reports
Uploaded: 2021-05-06T18:20:11.000Z
Duration: 10 min 4 s
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Hurricane Katrina, one of the  most destructive natural disasters 

in U.S. history, wreaked  damage worth $170 billion.

Adverbs of degree

That's an amount so staggering it dwarfs the annual economic output of most nations.

Flooding alone destroyed 300,000 homes in New Orleans,   while 19% of U.S. oil production capacity

was taken offline because of the 2005 hurricane season.

This is just one example of how  climate change not only has a 

human and environmental toll,  but also a huge financial cost.

One that economists say could lead to the world's next big financial crisis.

Climate change is the biggest challenge we face.

No one nation can solve this problem by itself.

And the worst thing would be if, you know, people care about this issue, we have this goal,

but 10 years from now people are going to see  that we are not really going to get the number down

Fighting climate change has hit the mainstream, with many of the world's most prominent leaders speaking out.

Yet, despite the sense of urgency, one common misconception is that we will need to

trade a healthy economy and jobs for a sustainable planet. Is there any truth in that?

I think now there is an understanding that this has some risks,

they also realize they might face some financial losses if they don't do anything.

Yannis Dafermos has done extensive research on climate change and financial stability.

He walked me through the two main reasons climate inaction could be a financial time bomb.

There are the physical effects, such as extreme weather events,

and the carbon transition, the impact that moving to a less

carbon dependent economy  will have on many industries. 

Let's start by looking at the physical risks.

These disasters are becoming more frequent and more severe.

Kristalina Georgieva is the International Monetary Fund's managing director.

Property is affected, production capacity of agriculture, of industry is affected, even the very financial institutions

may be affected and what this translates into is a risk for financial stability.

Disasters cost the global  economy $146 billion in 2019. 

Insurers covered $60 billion of that amount.

In fact, one of the largest insurance companies in the world, Swiss Re,

said that extreme weather events are growing in both number and severity.

This means many industries are bracing for even bigger losses in the future.

But these losses aren't just lines on a spreadsheet. They impact people like you and me.

Tens of millions of people, for example, have been displaced from their homes due to extreme weather.

So, how could that trigger a financial crisis?

Let's look at the fallout that could follow extreme flooding as an example.

If the flooding were to  happen in a populated area, 

property would inevitably be damaged  or even completely destroyed.

It is estimated that 50 to 80% of economic losses caused 

by natural and man-made  catastrophes globally are uninsured.

This means an uninsured homeowner  who took out a mortgage to 

purchase the property likely won't  be able to pay back their lender.

Factor in this happening to many, many more people 

and banks are left without  income from mortgage repayments.

As a result, lenders might reduce the number of loans they provide,

or charge more for the service in the form of interest.

Prospective homeowners looking to get a mortgage might not be able to do so,

and businesses may struggle to get loans to expand their operations.

It wouldn't be long before you have an economy grinding to a halt.

Although it had a different catalyst, the Great Financial Crisis resulted from

banks discovering that investments backed by  property had become near-worthless, 

and the ensuing credit crunch  caused the global economy to shrink.

This is not the only risk  facing our financial system. 

Managing Director Georgieva filled me in.

The world is clear that we have to move from a high to a low carbon intensity

so we can protect ourselves from rising temperatures

and the very disasters I spoke about, but when that happens,

industries that are in that area of high intensity become less valuable,

asset valuation changes and  this shift, if it is abrupt, 

can be quite difficult for financial institutions.

More countries are committing to becoming carbon neutral in the coming decades,

meaning they are trying to reduce emissions of CO2 and even capture greenhouse gases from the air.

But this transition to carbon neutrality requires many businesses to change how they operate.

Let's imagine that an oil-producing company has not changed its business model to

focus more on renewable sources of energy. As societies use less gasoline, this firm may lose value.

It simply becomes less attractive to investors. If many companies end up losing value because they

aren't adjusting to a low-carbon society, then this could eventually spark a market sell-off too.

If this happens without too much preparation, 

this can cause a kind of a  shock to financial markets.

There might be some indirect effects through the interconnection of the financial system,

I mean even those who might have already decided to invest more in green financial products,

if the financial system overall has a problem, they might also see some losses.

We live in an interconnected world  and financial markets span the globe. 

That's why a tsunami in Japan  or wildfires in California

could have an impact on the  retirement plans of a worker in Italy 

or on the stocks you bought using  platforms like Robinhood and eToro.

One element that could lead investors to 

adjust their positions in  the market is a carbon tax.

These levies are being discussed  in a wide range of countries and 

would focus on taxing companies  according to their emissions.

By making these firms pay more, governments hope that they will be incentivized to pollute less.

If in the coming years, governments  realize that it is necessary 

to act quickly in order to reduce emissions, they might therefore decide

to increase carbon taxes very quickly within a short period of time,

and this will be a problem  for those companies that 

rely too much on gas, oil,  coal for their production.

And then those banks that have  provided loans to these companies 

might not be in a position to remain stable.

So, what can be done to reduce the risks posed by climate change?

The very first and most important thing they need to do is to put in place policies and investments

to shift towards the new climate economy, one that is low carbon and climate resilient,

but they also need to concentrate  on the financial system 

because it is essential for the  functioning of our economies.

In the European Union, governments are working on 

several measures as they  implement the European Green Deal.

The plan aims to revitalize economic growth in the bloc whilst reducing the consumption of resources,

with a pledge to cut net greenhouse gas emissions to zero by 2050.

In addition, the U.S. has also promised to halve emissions by 2030 compared with 2005 levels.

Japan, Canada and even China have also announced plans to reduce emissions in the coming years.

Central banks, charged with  ensuring economic stability, 

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Why climate change is a ticking economic time bomb (and what we can do about it) | CNBC Reports

resilience

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crisis

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