Kyran Fitzgerald: Irish Fiscal Council sounds the alarm on the climate emergency

From Irish banks exposed to bad loans and the slow process to redirect resources, Kyran Fitzgerald writes on the climate challenges identified by a fascinating conference

Kyran Fitzgerald: Irish Fiscal Council sounds the alarm on the climate emergency

From Irish banks exposed to bad loans and the slow process to redirect resources, Kyran Fitzgerald writes on the climate challenges identified by a fascinating conference

Banks and investment funds have been gradually waking up to the implications of climate change.

Economists too across Europe are sitting up and taking note and not before time, the Irish Fiscal Advisory Council, or Ifac, the country’s budgetary watchdog – devoted its latest annual conference to the burning topic of Budgeting for Climate Change.

As a member of the council, Sebastian Barnes, observes that “addressing climate change will be a huge challenge for Ireland”.

In a sign of the times, the first speaker, an Italian academic and scientist, Elena Verdolini, delivered her address on screen from her home in Italy.

What she had to say was startling: For example, we are currently emitting twice the amount of carbon dioxide that the earth is in a position to absorb.

Once global temperatures rise more than 1.5 degrees celsius above pre-industrial levels, the associated risk and damage grows exponentially.

Warm-water corals are “already on their way to extinction” and mango forests are threatened but more resilient.

The impacts extend beyond melting glaciers, rising sea levels and flood events to include impacts on crop yields and human mortality.

She says that avoiding even a one-tenth of a degree rise in additional temperature matters a lot.

Eddie Casey of the Fiscal Council notes how economists have ducked a confrontation with the huge topic.

The Quarterly Journal of Economics, for example, had until very recently never published an article on climate change.

But with floods and storms on the increase across these islands a collision with reality cannot be postponed.

The impacts are already being felt on the factors of production, land, labour, and capital.

Land is ceasing to be productive as a result of repeated flooding. Labour too is suffering in productivity as a result of the health effects of flood events.

Buildings and infrastructure have been damaged repeatedly.

Efforts at innovation have been diverted towards adaptation, although arguably, one consequence of recent events could be an acceleration in the transition in Irish farming away from intensive stock rearing - at least in flood-prone areas.

Mr Casey suggests that the emergence of the green economy will entail higher rates of investment in areas such as the retrofitting of houses.

The Office of Public Works has carried out a detailed flood risk analysis and has produced flood risk tables for our major cities.

A rise in sea levels would leave much of the inner city in Dublin and Cork City is even more exposed. The State might have to step in to ensure payouts to businesses and householders hit by weather events.

The taxpayer faces huge costs in funding infrastructure when the national debt is already elevated.

The transition from carbon-intensive activities will create its owns problems as the exchequer earns a lot of its revenues from duties on motor fuel and taxes.

While carbon taxes will bring in increased revenues in the short to medium terms, the whole point about such taxes is that they are intended to change behaviour.

The banking sector could be exposed to large write-downs should the valuations of properties serving as security for mortgages be hit badly by rolling climate events. This may have to be reflected in the imposition of higher reserve requirements on banks.

“We face a wide range of challenges. We need to be clear about our targets and policies,” says Mr Casey.

Professor John FitzGerald, chair of the Climate Change Advisory Council, suggests that the Department of Finance will have to move to quantify the costs from the climate crisis.

Central Banks are now paying increased attention to the issue of global warming. The Irish Central Bank has assigned responsibility for this area to Vasileios Madouros. He warns that “climate change is the most complex of all the problems we are faced with. It is a substantial threat to financial stability”.

The Central Bank

The Central Bank

Investors in the private sector will have a key role to play.

Ensuring that the financial sector will be resilient to climate change will not be easy, Mr Madouros suggests.

“The effects of climate risks are broad-based, running across all sectors,” however, the time horizons for planning are much longer than is usually the case with projects backed by banks, he says.

The risks fall into two categories -- the straightforward physical risks posed by extreme weather events and the risks faced while the transition away from a fossil fuel-based economy is underway.

The Central Bank official points out that a too abrupt transition towards an economy based on renewable energy could be as damaging in its own as foot-dragging.

A sudden transition would result in energy companies being left with stranded assets, and could leave lenders sharply exposed.

Equally, the value of properties with low energy ratings could suddenly fall leading to further exposures.

A climate-resilient financial system will be required if the transition is to occur.

“In managing climate change, there is a paradox. Act too slowly, and you increase the physical risks. But act abruptly and you have a rapid adjustment in the financial system,” he says.

The Central Bank last year set up a network for the greening of the financial system and is active in a number of supervisory roles but it cannot develop its expertise overnight, Mr Madouros said.

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