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Let’s talk about the weather: the impact of climate change on central banks

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  • Batten,, Sandra

    () (Bank of England)

  • Sowerbutts, Rhiannon

    () (Bank of England)

  • Tanaka, Misa

    () (Bank of England)

Abstract

This paper examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives. We argue that two types of risks are particularly relevant for central banks. First, a weather-related natural disaster could trigger financial and macroeconomic instability if it severely damages the balance sheets of households, corporates, banks, and insurers (physical risks). Second, a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (transition risks). Climate-related disclosure could facilitate an orderly transition to a low-carbon economy if it helps a wide range of investors better assess their financial risk exposures.

Suggested Citation

  • Batten,, Sandra & Sowerbutts, Rhiannon & Tanaka, Misa, 2016. "Let’s talk about the weather: the impact of climate change on central banks," Bank of England working papers 603, Bank of England.
  • Handle: RePEc:boe:boeewp:0603
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    References listed on IDEAS

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    Cited by:

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    2. Dunz, Nepomuk & Naqvi, Asjad & Monasterolo, Irene, 2019. "Climate Transition Risk, Climate Sentiments, and Financial Stability in a Stock-Flow Consistent approach," Ecological Economic Papers 23, WU Vienna University of Economics and Business.
    3. Dafermos, Yannis & Nikolaidi, Maria & Galanis, Giorgos, 2018. "Climate Change, Financial Stability and Monetary Policy," Ecological Economics, Elsevier, vol. 152(C), pages 219-234.
    4. Lorenzo Esposito & Ettore Giuseppe Gatti & Giuseppe Mastromatteo, 2019. "Sustainable finance, the good, the bad and the ugly: a critical assessment of the EU institutional framework for the green transition," DISCE - Quaderni del Dipartimento di Politica Economica dipe0004, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    5. Yongping Liu & Chunzhong Huang & Zongbao Zou & Qiao Chen & Xuan Chu, 2020. "Research into the Mechanism for the Impact of Climate Change on Systemic Risk—A Case Study of China’s Small- and Medium-sized Commercial Banks," Sustainability, MDPI, Open Access Journal, vol. 12(22), pages 1-21, November.
    6. Oustry Antoine & Erkan Bunyamin & Svartzman Romain & Weber Pierre-François, 2020. "Climate-related Risks and Central Banks’ Collateral Policy: a Methodological Experiment," Working papers 790, Banque de France.
    7. Ivan Diaz-Rainey & Becky Robertson & Charlie Wilson, 2017. "Stranded research? Leading finance journals are silent on climate change," Climatic Change, Springer, vol. 143(1), pages 243-260, July.
    8. Simon Dikau & Ulrich Volz, 2019. "Central Bank Mandates, Sustainability Objectives and the Promotion of Green Finance," Working Papers 222, Department of Economics, SOAS, University of London, UK.
    9. Sen, Suphi & von Schickfus, Marie-Theres, 2020. "Climate policy, stranded assets, and investors’ expectations," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
    10. Andersson, Malin & Baccianti, Claudio & Morgan, Julian, 2020. "Climate change and the macro economy," Occasional Paper Series 243, European Central Bank.
    11. Hyoungkun Park & Jong Dae Kim, 2020. "Transition towards green banking: role of financial regulators and financial institutions," Asian Journal of Sustainability and Social Responsibility, Springer, vol. 5(1), pages 1-25, December.
    12. D’Orazio, Paola & Popoyan, Lilit, 2019. "Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies?," Ecological Economics, Elsevier, vol. 160(C), pages 25-37.
    13. Etienne Espagne, 2018. "Money, Finance and Climate: The Elusive Quest for a Truly Integrated Assessment Model," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 131-143, March.
    14. Monasterolo, Irene & Raberto, Marco, 2018. "The EIRIN Flow-of-funds Behavioural Model of Green Fiscal Policies and Green Sovereign Bonds," Ecological Economics, Elsevier, vol. 144(C), pages 228-243.
    15. Irene Monasterolo & Stefano Battiston & Anthony C. Janetos & Zoey Zheng, 2017. "Vulnerable yet relevant: the two dimensions of climate-related financial disclosure," Climatic Change, Springer, vol. 145(3), pages 495-507, December.
    16. Gregor Semieniuk & Emanuele Campiglio & Jean‐Francois Mercure & Ulrich Volz & Neil R. Edwards, 2021. "Low‐carbon transition risks for finance," Wiley Interdisciplinary Reviews: Climate Change, John Wiley & Sons, vol. 12(1), January.
    17. Eftichios S. Sartzetakis, 2019. "Green Bonds as an instrument to finance low carbon transition," Working Papers 258, Bank of Greece.
    18. Christos Karydas & Anastasios Xepapadeas, 2019. "Climate change risks: pricing and portfolio allocation," CER-ETH Economics working paper series 19/327, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    19. Mukanjari, Samson & Sterner, Thomas, 2018. "Do Markets Trump Politics? Evidence from Fossil Market Reactions to the Paris Agreement and the U.S. Election," Working Papers in Economics 728, University of Gothenburg, Department of Economics.

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    More about this item

    Keywords

    Climate change; natural disasters; financial stability; monetary policy;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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