Why the outrage over Carney's climate speech? Opinion Article

Oct 01, 2015 - 1:40pm

This article first appeared in FT Alphaville on 3 June, 2015.

Kate Mackenzie
Manager, Investment and Governance

Anytime a public figure mentions climate change, you can guarantee a fierce response — and, sure enough, it happened again with Mark Carney’s speech on climate risk.

The response from Birmingham University’s Tony Yates (a BoE old-timer) was typical: Carney “is not qualified to intervene either as a scientist or an elected representative” and “it’s not (Carney’s) place to call for action on climate change”.

The problem is, none of this happened. Carney didn’t “intervene”, he merely indicated that the Financial Stability Board, which met last week to discuss financial climate risk at the behest of the G20, was considering a joint industry initiative to develop a voluntary standard for carbon risk disclosure. Pretty tame stuff really — the idea is to model it on the Enhanced Disclosure Task Force which came up with voluntary bank risk standards in 2012 and so far, doesn’t seem to have threatened the very credibility of central banks or anyone else involved.

Should Carney have dedicated a speech to the topic, then? Some people dislike central bankers daring to opine on anything, but would anyone really want to be deprived of a good Haldane speech on interconnectedness, volunteering or just about any topic?

Apart from the FSB meeting, Carney was also commenting on the just-released report into insurance sector exposure to climate risk, commissioned by DEFRA and conducted by the BoE’s Prudential Regulatory Authority. The report is interesting reading, for me at least — I was surprised that it highlighted possible future risks relating to greenhouse gas emission liability, but it finds that the insurance sector, so far, appears to be managing climate change as you’d expect for an industry that is meant to “peer into the future”. Carney’s speech was at Lloyd’s of London; it makes sense he’d talk about it.

Finally, Carney didn’t actually call for action on climate change. He only mentions such action in order to put into context the “stranded assets theory”, which is the key reason for the Bank and the FSB to be thinking about climate risk to financial systems.

To be clear, let’s re-read Carney’s apparently inappropriate comments in which he “intervenes” and “calls for action”. I’ve highlighted what might be the most egregious parts:

This paradox is deeper, as Lord Stern and others have amply demonstrated. As risks are a function of cumulative emissions, earlier action will mean less costly adjustment

The desirability of restricting climate change to 2 degrees above pre-industrial levels 12 leads to the notion of a carbon ‘budget’, an assessment of the amount of emissions the world can ‘afford’…

Such a budget – like the one produced by the IPCC 13 – highlights the consequences of inaction today for the scale of reaction required tomorrow…

These actions will be influenced by policy choices that are rightly the responsibility of elected governments, advised by scientific experts. In ten weeks representatives of 196 countries will gather in Paris at the COP21 summit to consider the world’s response to climate change. It is governments who must choose whether, and how, to pursue that 2 degree world.


Given that 190-odd countries agreed back in 2009 to try and limit warming to below 2 degrees, and that a similar number of countries will meet in Paris in December to agree a new framework to pursue that goal, how is Carney supposed to avoid commenting on it? Much of his speech was, after all, based on stranded asset theory (more about that later) and that, in turn, is entirely based on the premise that the world will somehow make an effort to avoid dangerous climate change by not burning much of the fossil fuel reserves that have been discovered and valued.

As I mentioned on Twitter to Yates, to not mention climate action in the context of climate change and financial stability — which, remember, both the FSB and the BoE have been asked to examine by policymakers — would be a bit like talking about an ageing population without acknowledging that provisioning may, one day, become an issue.

But analogies with other types of risk only takes you so far. The very nature is that this is unique and pervasive.

The thing that most of the critics of Carney’s speech (who mostly seem to be from the fossil fuel sector, if this is anything to go on) seem to miss is that this is about a foreseeable change that could very likely result in disruption to financial systems, if not facilitated clearly and in good time. Carney also made very clear that it wasn’t the FSB or BoE’s role to protect everyone from risks around climate change — but it was suitable for financial authorities to help develop a good and consistent disclosure method, so that market participants can take their own views.

At the moment, many investors are taking a view, but it’s clouded by numerous methods of disclosure that are impossible to compare.

Still, some people will just really dislike climate change being mentioned in the financial world. Several times I’ve heard it said that it’s not their concern.

I’m going to guess most other people who are irked by Carney talking about climate fall into these categories:

  1. They’re in or close to the fossil fuel industry and just can’t countenance a big shift away from fossil fuels.
  2. They’re uncomfortable because they think climate is a “debate” which technocrats should therefore completely avoid.
  3. They don’t understand implications of climate change (I’ve heard of analysts who genuinely think everything will just be a little warmer, therefore the main effects will be more demand for swimming pools and cold drinks).
  4. They feel it’s too “emotive” (unlike, say, QE or Chinese growth prospects, which no-one ever gets emotional about).
  5. They have a straightforward misconception that central banks’ remits don’t extend beyond monetary policy, whereas many also have a financial stability or similar remit.
  6. They don’t think “stranded assets” stacks up. Which is fine, but then by definition you’re counting on a business-as-usual scenario, one which the IEA among others says will likely lead to 3.5 to 4 degrees of warming.

A 4 degree warmer world is probably unpleasant and may be horrendous. And it might not stop there – 6 degrees is also a possibility. I haven’t seen any rigorous arguments that 4 degrees higher won’t have any implications for the financial system. The risks are really heavily tilted to the downside.

In fact, one of the worst things about counting on “business as usual” is that we don’t know a lot about the possible outcomes beyond about 3 degrees, as Gernot Wagner and Martin Weitzman explain in “Climate Shock” (see Martin Wolf’s review here). And most of the “carbon budget” numbers you hear only give a 66 per cent chance of avoiding 2+ degrees.

Kate Mackenzie

Kate is Investment & Governance Manager at The Climate Institute. Prior to joining the Institute in 2014, she worked primarily as a financial journalist, winning awards for her work at the Financial Times and the Australian. Earlier, she was a technology and business reporter for the Australian, and online editor of Australian IT. Kate is a veteran of new media, and was one of the first online journalists to be hired by the ABC in the late 1990s.

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