Climate risks climb the agenda at Davos 2024

January 22, 2024|Written by |Banco Central do Brasil, European Central Bank, Swiss National Bank

The risk that climate change poses to the global economy – and the way that policymakers can reduce that risk – came up repeatedly at this year’s gathering of the rich and powerful at the World Economic Forum in Davos.

Panellists debated whether or not the mandate of central banks should be widened to reflect the impact of environmental changes on price stability, as well as whether climate risks more broadly are underpriced in the global economy.

European Central Bank (ECB) chief Christine Lagarde, meanwhile, questioned whether current economic models are properly equipped to address the climate crisis.

Exogenous shocks such as extreme weather events are undervalued in contemporary models, she told a town hall discussion titled How to Trust Economics, recalling how she had told new colleagues upon her arrival at the ECB: “Beware of models.”

“If we had more consultations with epidemiologists, if we had had – and we now have, thank goodness – climate change scientists inside to help us with what’s coming up,” she said, “I think we would be in a better position to actually understand the developments, project better, and be better economists.”

At a panel titled All Change: What’s Next for Monetary Policy?, former Bank of England and Bank of Canada governor Mark Carney was among several participants grappling with the question of whether the mandate of central banks requires an update.

“I think the principal role of central banks with respect to climate is with respect to the resilience of individual financial institutions and the system as a whole,” said Carney, who is now a UN special envoy on climate action and finance.

Fellow panellist Thomas Jordan, chairman of the governing board of the Swiss National Bank, reflected a familiar view that central banks can only justify their independence by maintaining a narrow mandate of price stability.

But Harvard Business School professor Laura Alfaro pointed out that it was easy for wealthy Davos attendees to forget that it is the world’s poor who are already feeling the painful impact that climate change has on the soaring cost of food and other essentials.

“Climate affects prices and many central banks have already incorporated that,” she noted. “The Brazilian central bank does consider what is going to be the effect of El Niño, La Niña, on agriculture – and so it’s already there, because it is affecting the final price.”

At a session entitled Are the Financial Risks of Climate Change Under-Priced?, Inger Andersen, executive director of the UN Environment Programme (UNEP), announced the launch of a new risk centre to help the financial sector better assess climate risks.

“To a large extent, the financial sector has begun to look at the climate risk,” she said. “But I would venture to say that there’s much more in my space that the financial and beyond sectors need to look at, because it impacts our very economies.”

The new UNEP risk centre would cover “the climate, as well as the nature, as well as the pollution, as well as other emerging environmental risks that we can see”, she said, adding that she hoped it would provide “tools for development in various sectors and subsectors and provide some decision tools”.

The discussions came as a report released by the World Economic Forum ahead of the summit found that risk specialists saw extreme weather as the phenomenon most likely to trigger a global crisis in 2024.

This page was last updated January 23, 2024

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