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  • Hurricane Katrina, one of the  most destructive natural disasters 

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

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

  • Flooding alone destroyed 300,000 homes in New Orleanswhile 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

  • human and environmental tollbut 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 gasolinethis 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 ofshock 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, oilcoal 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

  • have also started studying how to  tackle climate risks in their policies.

  • Climate change is the biggest challenge we face 

  • but it is also the greatest  opportunity of our lifetimes

  • because managing climate risks is taxing, but the way we do it

  • by investing in climate  resilience and new technologies

  • offers opportunities for  green growth and green jobs.

  • Investing in a low-carbon society may have wider economic benefits too.

  • An initial 5% of GDP green investment push combined with gradually increasing carbon prices

  • and attention to those that are affected negatively from the transition,

  • this can be very beneficial  for the world economy,

  • it can increase growth by 0.7% on an  annual basis over the next 15 years.

  • Hi everyone, thank you so much for watching.

  • Are you worried about the risks that climate change could pose to your savings and investments?

  • Let us know in the comments section, and I will see you soon.

Hurricane Katrina, one of the  most destructive natural disasters 

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

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    Summer posted on 2021/05/06
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