Climate and finance systemic risks, more than an analogy? The climate fragility hypothesis

In this paper, we develop the notion of climate systemic risk. Climate change is usually considered as a negative externality, against which society can insure itself through a carbon tax or an emission trading market. But except under the unrealistic efficient market hypothesis, there is little chance that such a simple approach to climate policy succeeds in mitigating climate damages. Financial and climate fragility reinforce each other. We argue that in concrete economies, a collective insurance approach to climate change has to target the financial sector, as well as its articulation with monetary policy. As in the financial world, climate change thus constitutes a systemic risk against which specific ex ante and ex post monetary policies and financial regulations should be deployed. The Paris Agreement of COP21 ignores the policy consequences of such an approach to the climate threat, but the exegesis of the text still offers some indispensable pillars to promote a new financial order mitigating climate systemic risk.