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Climate change may spark next financial crisis, former Bank of England regulator says

The Statue of Liberty and a brick walkway damaged in Superstorm Sandy in New York. CREDIT: AP/Richard Drew
The Statue of Liberty and a brick walkway damaged in Superstorm Sandy in New York. CREDIT: AP/Richard Drew

“It is potentially a systemic risk.”

Climate change could cause the next financial crisis, the former deputy head of the Bank of England’s regulatory department said Monday.

Climate change “is potentially a systemic risk,” Paul Fisher, who recently retired as deputy head of the Prudential Regulation Authority, told Bloomberg. “It could be the trigger for the next financial crisis,” he said, noting that climate change can force a sudden change in prices in a similar way that the United Kingdom’s decision to leave the European Union damaged the sterling’s value.

Fisher, an expert on monetary policy and financial markets, explained the effects of climate change — storms, drought, and other environmental instability — can move financial markets as there is a risk of “system-wide repricing of assets happening quite suddenly.” He also said that policy changes, such as implementing a carbon tax, could have a market effect.

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Some elected officials argue that environmental policies to reduce the emissions that cause climate change are too costly, and Fisher’s comments come in line with years of economic research that underscore the importance of predictable regulatory regime over market instability. Not acting on climate change could be much worse, economically.

Last year a study published in Nature estimated that 77 percent of countries could see their incomes fall by 23 percent in the next 75 years if human-caused climate change goes unchecked. A drop in incomes can, among various things, cause a fall in stock market prices, damage the exchange rate, and inspire an overall loss of business as people move to spend less.

Other studies have found that the warmer it gets, the less productive a country’s economy will likely be.

Researchers have warned that climate change is poised to hurt agricultural production. That would cause produce prices to rise. Some studies suggest that major losses in agriculture may occur as early as the 2030s, even if the world limits warming to 2°C, which is the threshold generally believed to be needed to avert the most catastrophic effects of climate change.

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Extreme weather events, such as the floods and wildfires associated with climate change, are known to disrupt economic activity in the short term. They also cause property damage that may translate into debt in the long term. Extreme weather events are known to come with a hefty price tag. For example, the worst extreme weather events in the United States in 2014 caused $19 billion in damage, according to a Center for American Progress analysis.

“You don’t need to believe in climate change, you don’t need to believe that it is man-made,” Fisher added. “You just need to believe that governments are going to do stuff and that is going to affect your business. And then it is a material risk.”