Let's Talk About the Weather: The Impact of Climate Change on Central Banks

38 Pages Posted: 24 May 2016

Date Written: May 20, 2016

Abstract

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.

Keywords: Climate change, natural disasters, financial stability, monetary policy

JEL Classification: E58, G21, G22, Q43, Q54

Suggested Citation

Batten, Sandra and Sowerbutts, Rhiannon and Tanaka, Misa, Let's Talk About the Weather: The Impact of Climate Change on Central Banks (May 20, 2016). Bank of England Working Paper No. 603. Available at SSRN: https://ssrn.com/abstract=2783753 or http://dx.doi.org/10.2139/ssrn.2783753

Sandra Batten (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rhiannon Sowerbutts

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Misa Tanaka

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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