Let's talk about the weather: the impact of climate change on central banks

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 20 May 2016

Working Paper No. 603
By Sandra Batten, Rhiannon Sowerbutts and Misa Tanaka

This paper examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives. We argue that two types of risks are particularly relevant for central banks. First, a weather-related natural disaster could trigger financial and macroeconomic instability if it severely damages the balance sheets of households, corporates, banks, and insurers (physical risks). Second, a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (transition risks). Climate-related disclosure could facilitate an orderly transition to a low-carbon economy if it helps a wide range of investors better assess their financial risk exposures.

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