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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