Mark Carney focuses on climate change, not Brexit, on visit to Canada
Fear of a “Minsky moment” — a sudden collapse in asset values that could set economies ablaze — keeps Bank of England governor Mark Carney up at night.
But the focus of that fear, at a Toronto talk on Friday, was climate change, not the economic elephant in the room, Brexit.
The former Bank of Canada governor talked about the implications of climate change on the financial sector with Environment Minister Catherine McKenna, at a packed Toronto Region Board of Trade event a day after the Bank of England announced a surprise decision to keep the U.K. interest rate as it is.
“The thing that keeps central bankers up at night is the sort of sudden change in risk. We saw that in 2007- 2008,” he said. “We’ve had risk of that in recent years and we don’t want to have one around climate.”
Climate change is what Carney called the “tragedy of the horizon,” an allusion to the classic environmental economic problem the “tragedy of the commons,” but amplified because the impacts of climate change will be felt by future generations.
(The term “tragedy of the commons” refers to an economic theory of a shared-resource system in which members act independently according to their own self-interest against the common good and deplete resources through their collective actions.)
“I wouldn’t get too caught up in the current headlines, there are always issues on the plates of leaders,” he said in answer to a question about whether that lurking tragedy was being overshadowed by current events, such as the U.K.’s decision to leave the European Union and the U.S. presidential election.
“The measure of those leaders is the ability to deal with the day-to-day, and also look to the medium and long term.”
It was the closest he came in the hour-long talk to touching on one of the biggest challenges of his career, the fallout from the U.K’s vote last month to leave the world’s largest trading bloc.
The Brexit vote shocked global markets, causing the pound sterling to plummet by 10 per cent against the U.S. dollar, and sent the London Stock Exchange into a downward spiral.
The decision left many asking questions about whether the U.K. economy is facing a recession and expecting the Bank of England governor to step in with stimulus measures.
But the central bank Thursday left its interest rate at 0.5 per cent, although it signalled it could cut rates at its next announcement in August.
Carney’s appearance in Toronto came a day after he sat down with new British Prime Minister Theresa May for the first time.
Carney, who said he was in Canada to visit his brother, said climate change presents both an unprecedented challenge and a great opportunity for the financial sector.
The risk of extreme weather events has risen threefold since the 1980s, while the cost of natural disasters has increased fivefold, he said.
Meanwhile, he noted that global commitments to reduce carbon represent $5-$7 trillion (U.S.) a year in clean infrastructure opportunities.
Environment Minister McKenna and her global counterparts signed the Paris Agreement late last year. The deal committed Canada and other signatories to take measures to hold the increase in global average temperature to 2C above pre-industrial levels, with a stretch goal of 1.5C.
But the plans governments showed up with at that Paris meeting, if fully implemented, would fall short of the 2C goal, Carney noted.
“We won’t get our core goal and we certainly won’t get our stretch goal, so what that tells you is that more will ultimately have to be done.”
That means the private sector will have to step in, Carney said.
He believes businesses need more information and need to be more transparent about risk and opportunities in a carbon-restricted economy.
Carney, the chair of the international Financial Stability Board, has appointed former New York City mayor Michael Bloomberg to lead a task force on voluntary financial risk disclosure guidelines that will share climate-related risks with investors, lenders and other stakeholders.
If they do not face the issue head on, he said, the global economy could face a “climate Minsky moment.” This refers to economist Hyman Minsky, who suggested that bankers, traders and other financial players periodically cause financial crises, a recent example being the 2008 subprime mortgage crisis in the U.S.
He believes the private sector will get more serious once governments can convince companies that climate policy is real, universal and that tangible action is being taken.
“Then the market will do what the market does best, which is to pull forward adjustment and reward winners, punish losers and reinforce managements that are thinking in a forward sense.”