Fifty Shades of Green

Author:Mark Carney
Position:MARK CARNEY is governor of the Bank of England.

The world needs a new, sustainable financial system to stop runaway climate change

12 FINANCE & DEVELOPMENT | December 2019
Fifty Shades of Green
The world needs a new, sustainable financial system
to stop runaway climate change
Mark Carney
THIS YEAR the threats f rom climate change spurred
demonstrations across the world and prompted the
parliaments in the United Kingdom and many
other countries to declare a “climate emergency.
ese actions occurre d against a backdrop of record
temperatures across Europe and Nort h America,
the worst wildres ever in the Amazon basin,
severe tropical storms in Asia, and sea levels that
are rising faster t han previously thought.
e human costs are immeasurable.
e nancial losses , however, can be measure d,
and they are signi cant. Insured losses in 2018 were
$80 billion, double the ination-adjusted average
for the past 30 years.
But protection gaps in low- and middle-income
countries mean that even greater costs are being
borne by the uninsured. In 2017, a record $140 bil-
lion in insured losses was eclipsed by an additional
uninsured $200 billion. In some of the countries
most exposed to climate change—Bangladesh,
Egypt, India, Indonesia, Nigeria, the Philippines,
and Vietnam—insurance penetration is less than
1 percent.
e potential economic benets of closing the insur-
ance gap are striking. Lloyd’s of London estimates that
a 1 percent rise in insurance penetration can translate
into a 13 percent reduction in uninsured losses and
a 20 percent lower disaster recovery burden on tax-
payers. Substantial macroeconomic benets include
increased investment, higher output (potentially up
to 2 percent of GDP), and greater climate resilience.
A 2018 Intergovernmental Panel on Climate
Change report stresses that we have only 12 years
left to stop runaway climate change. at is two
average business cycles, 12 IMF annual meetings, 48
meetings of the Bank of England’s Financial Policy
Committee. But currently the world is moving in the
wrong direction: global energy emissions increased
1.7 percent last year. To limit warming to 1.5˚C
requires a 45 percent decrease by 2030 and net-zero
emissions by 2050.
e changes needed to keep wa rming below
1.5˚C are enormous: massive reallocat ion of capital
is needed, which presents unprecedented risk s and
opportunities. e International Energ y Agency
estimates that a low-ca rbon transition could require
$3.5 trillion in energy sector investment every ye ar
for decades—t wice the current rate. Under the
agency’s scenario, in order for carbon to stabili ze
by 2050, nearly 95 percent of the electricity supply
must be low carbon and 70 percent of new cars
electric, and the ca rbon dioxide intensity of the
building sector must fall 80 percent.
For markets to anticipate and smooth the tra nsi-
tion to a net-zero world, they need the right infor-
mation; proper risk management; and coherent,
credible public p olicy frameworks .
Here’s how.
A new finance
A new, sustainable nancial system is under construc-
tion. It is funding the initiatives and innovations of
the private sector and amplifying the eectiveness
of governments’ climate policies—it could even
accelerate the transition to a low-carbon economy.
Unfortunately, like virtua lly everyth ing about
the response to climate cha nge, this new sustainable
nancial sy stem is not developing fast enough for
the world to reach net zero.

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