How Will Central Banks Respond to the Risks Presented by Climate Change?
For its part, the Bank of Canada this month initiated a research program devoted to understanding how climate change could affect the central bank’s work. “While this transition creates opportunities for innovation, investment and potential green growth, it also poses economic transition risks,” including “stranded assets,” such as existing oil reserves that wouldn’t have a market in a low-carbon economy, and a significant repricing of equities and other assets linked to a carbon-based economy, said Miguel Molico, senior director of research in the Financial Stability Department, in a report on what the Bank of Canada plans to study.
Given that Canada’s oil industry is concentrated in one province, the Bank of Canada will study the impact of various transition scenarios at regional levels, rather than just at the national level, according to Molico’s report. Among the medium-term objectives is a plan to assess whether historical crude prices inform how the Canadian economy could be affected by an eventual shift away from oil. The central bank also intends to do extensive research on how the shift to a low-carbon economy could affect financial stability, given the exposure of banks to the oil industry.