Climate change – adapting and planning for a different world

Governor of the Central Bank of Ireland Gabriel Makhlouf spoke this morning at the Environmental Protection Agency’s Annual Climate Change Conference.

Delivering the keynote speech, Governor Makhlouf said, “All transitions pose challenges and climate change is one of the three significant economic transitions we are undergoing right now.”

“The world has decided that it wants to manage this transition by prioritising the decarbonisation of our economies as, to state the obvious, the alternative isn’t appealing.  Time is not our friend here.  The world agreed in Paris in 2015 to limit the increase in the average global temperature to 1.5 degrees Celsius above pre-industrial levels by 2050.  As things stand, we are heading for a global temperature rise far above the Paris Agreement goals.

“We must carry on with the transition to net zero and we have to plan for a world that is going to have a different climate to what we are used to.  The speed and depth of decarbonisation targets are unprecedented, but they are also technically feasible and, without doubt, represent the lowest cost route for society in the long-run. Climate change and climate damages should peak this century, if the globe meets its emissions targets. Until then, we will also need to adapt.

“Only governments can change the technology choice environment and steer the economy to net zero. There is no silver bullet when it comes to effective climate policy, but reaching targets on time will be more challenging without international coordination on carbon pricing.  We also need to be careful not to prevent innovation that supports the transition as a result of geopolitical conflict or the misguided hope that autarky through strategic autonomy has more benefits than costs and that it will somehow not damage our efforts to achieve net zero.

“So, amidst uncertainty and risk, what can we control domestically? 

“For one: over the past ten years, €65bn left Ireland through energy imports. By 2050, Ireland has the potential to be a major renewable electricity exporter.

“For another, we have control of our own carbon pricing – and we are on the right path – but international agreement in this area will be vital for global decarbonisation in the coming years. 

“We know that Ireland will have more frequent and severe flood events over the coming decades.  Where risks are deemed too high, properties may end up being uninsurable, which has knock-on implications for the riskiness of mortgages held by banks. 

“While global decarbonisation must be the first line of attack, we can also protect our households and businesses by investing in adaptation measures such as flood defences. First and foremost, flood defences protect communities and livelihoods from severe hardship. Defences also maintain individual household and business asset values, increasing their economic and financial resilience. 

“Significant progress has already been made, but the clock is ticking and the window of opportunity to take preventative action may be closing faster than we realise.  

“The insurance market is facing major challenges. Without adaptation, rising physical risks like flooding have clear implications for insurers and policyholders – more frequent and severe events will bring more claims, higher premiums and lower insurance coverage in risky areas. 

“In areas where flood defences are neither economically or technically feasible, or in situations where defence infrastructure will take many years to complete, lessons from international policy innovations may help. Consideration could be given to interim measures that could mitigate flood risk until defence infrastructure is in place. Reducing risk through adaptation allows insurers to retain a risk-based pricing approach and potentially expand risk appetite and offers of insurance. This might be achieved through recognition of measures put in place by policyholders to lessen the risk. 

“Similarly, public-private collaboration, whether it is through provision of expertise or another mechanism such as a partnership, also enables insurers to retain a risk-based approach to pricing. It may be possible to set up risk sharing/solidarity schemes where funds are pooled to support insurance provision in risky areas.”

Concluding, Governor Makhlouf said: “The financial sector’s role is clear. Failure to decarbonise financial flows will lead to a build-up of climate risks in the system. Central banks have a responsibility to monitor and forecast these risks, and then to act to maintain financial stability.    

“Government’s role is also clear, as it has to steer the real economy to net zero by creating an environment that provides the right incentives and favours low emission choices. 

“Achieving net zero by 2050 is unquestionably the lowest cost option for society, the economy and the financial system. Different sectors have different roles and challenges in the transition. But net zero – at its core – is a real economy transition, ultimately dependent on business and household decisions.” 

The Governor's speech can be read in full here.