Bank of England's KnowledgeBank guide to the race is on.
The economy and the environment have always been linked, but understanding these linkages has become increasingly important, as economic growth places greater demands on the world’s natural environment. And results in the use of more and more of the world’s natural resources.
One angle to consider relates to climate change and the notion of a finite carbon budget. To guard against the risks of severe and irreversible climate change, scientists have estimated an all-time budget for global carbon emissions, to have a reasonable chance to limit the increase in average global temperature to two degrees centigrade.
Rewind back to 1700, before the industrial revolution, and this budget was virtually unused. And the global economy was tiny compared to today and barely growing. By the time of the first moon landing in 1969 we had used just under a quarter of this carbon budget. Since the moon landing, as we have experienced significant economic growth, we have used around an additional 50% of the total budget. Meanwhile, the global economy has grown more than a hundred times in size since 1700.
So, while estimates of the total budget can vary, we now only have around one quarter left, with an economy that’s become many times larger. If emissions continue at the same rate as today, our all-time budget may expire within the next 20 years or so, increasing the risk of severe and irreversible changes in the world’s climate.
At the Bank of England, we have a responsibility to maintain a stable financial system. So an important part of our role is to better understand how climate change affects the global economy. Any risks to financial stability, and how to support a smooth transition to a greener economy.