Climate of distraction

Matt Burgess
Insights Newsletter
5 November, 2021

This week’s Financial Stability Report continues the Reserve Bank’s fascination with climate change.

It says rising seas and changing weather patterns will lead to financial losses. More insurance claims. Higher premiums. Asset prices could fall. Some assets could become uninsurable.

All of this is true.

The Reserve Bank Governor, Adrian Orr, says the financial losses from climate change are a “key risk to global financial stability.”

It is not clear how. Economies are not that sensitive to the effects of climate change.

The UN Intergovernmental Panel on Climate Change puts global GDP losses from climate change in 2100 at 2.6%.

By then, the New Zealand economy will be around 9 times its current size if growth over the last three decades continues. Climate change will reduce this to just 8.8 times. The level of GDP which we would have achieved by 2100 will be postponed to 2102.

Also leaning against financial instability is that financial institutions have already had decades to prepare for the effects of climate change. By 2100, they will have had over a century.

The Reserve Bank is not the only central bank that is worried about climate change. But after partnering with other regulators and three years of looking, the Reserve Bank has not found credible evidence of a stability threat.

Between 1997 (the earliest available online records) and March 2018, the Reserve Bank did not once refer to climate change in any Financial Stability Report, Annual Report, or Statement of Intent.

This year’s Annual Report from the Reserve Bank has three times more references to climate change than inflation.

Which makes the Reserve Bank look distracted in the current environment. With elevated asset prices, rocketing public debt, looming inflation, in a country which sits on colliding tectonic plates in the middle of a pandemic, the Reserve Bank is talking about climate change, an issue for which it has no legal or democratic mandate.

The Reserve Bank aims to “foster long term decision-making… for the needs of future generations.” It will take more than virtue signalling and unsupported assertions to deliver this ambitious goal.

What’s needed, Mr Orr, is rigour.

Climate change is many things. But it is not a plausible threat to financial stability. Systemic risk is not the fact that some investors somewhere will lose money some day. As economist John Cochrane says:

'The idea that climate change poses a threat to the financial system is absurd, not least because everyone already knows that global warming is happening'.

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