Fifty Shades of Green

• Author: Mark Carney
• Position: MARK CARNEY is governor of the Bank of England.
• Pages: 12-15

12 FINANCE & DEVELOPMENT | December 2019

POINT OF VIEWPOINT OF VIEW

Fifty Shades of Green

The world needs a new, sustainable financial system

to stop runaway climate change

Mark Carney

PHOTO: COURT ESY OF TH E BANK OF EN GLAND

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.