This week’s COP26 summit in Glasgow offers a vital opportunity to set a clear path to a zero-carbon world. Eliminating carbon emissions is the only way to contain catastrophic climate change. Although the door for this transition to meet the objectives of the Paris Agreement on time is closing rapidly, the important thing is that it is still open.
This transition may have some costs, but it also presents opportunities. Technological progress has greatly reduced the cost of solar energy, which has become one of the cheapest sources of electricity ever known. In fact, according to the International Energy Agency, more than half of the additional emission reductions needed to meet the targets of the Paris Agreement could be achieved without additional costs to consumers.
But we still cannot depend only on renewable energy sources and there are still sectors in which the necessary technology is not yet mature. We don’t know for sure what our economies will look like 30 years from now or exactly how climate change will affect us in the future. This uncertainty can be paralyzing, especially when associated with the mistaken belief that we cannot influence things individually, or that it is too late. However, we can all make a difference and we all have something to contribute.
In recent decades, central banks have learned that a credible inflation target can help guide expectations for the entire economy. Governments can equally guide individuals and businesses to take important and coordinated steps to contain climate change by proposing credible and adequately explained transition pathways. With clear signs, long and difficult trips are divided into more bearable stages.
In part, these transition paths require that carbon pricing fully reflects its present and future environmental and social costs, which is far from the current situation, even more so when we consider that fossil fuels received 450 billion euros. Dollars [388.000 millones de euros] in explicit subsidies in 2020. Strong increases in energy prices can affect the most vulnerable in our society, which is why a deep reflection is necessary to ensure a just transition in which the benefits are shared equally.
Climate change creates risks for the banks we supervise and for the ECB’s own balance sheet
These paths require significant technological innovations and investment to mitigate climate change. Public investment can serve as a catalyst for private investment and the financial sector plays a prominent role. Financial institutions must indicate in their transition plans how they plan to adapt to a world without emissions. The Glasgow Financial Alliance for Net Zero is taking the first steps in that direction. Publishing complete, internationally comparable and auditable data can help funds flow where they are most needed while avoiding the risk of green laundering (greenwashing).
Central banks also have a role to play. The impact of natural disasters and the green transition on inflation directly affects the main mandate of the European Central Bank (ECB) to maintain price stability. This is why we are paying more and more attention to climate change. This also creates risks for the banks we supervise and for the ECB’s own balance sheet.
Our concern is shared. About 100 central banks and financial supervisors from around the world have come together to form the Network for Greening the Financial System. This network tries to contribute to the development of climate and environmental risk management in the financial sector and to mobilize it to support the green transition.
We have to make a real decision
This Wednesday the ECB pledged to support, within our scope of responsibility, actions decided by the authorities to implement the Paris Agreement and mitigate the consequences of climate change. Climate transformation was an important aspect in the recent review of our strategy and we have launched an ambitious roadmap that defines our work agenda.
Our economy-wide climate stress tests show the benefits of acting early on climate issues. The short-term costs of the green transition are largely outweighed in the long term by the benefits of avoiding costly natural disasters, such as fires, heat waves, and droughts. Defining intermediate milestones on the path to net zero emissions in 2050 could help guide our way.
We have to make a real decision. As we rebuild our economies in the aftermath of the pandemic, we have a chance to leave carbon behind. The way forward can be intimidating, but we know our destination and much of the journey is already lit up. The transition to a carbon-free world is the only way to ensure a better future for all humanity. In the words of Antoine de Saint-Exupéry, “the time to act is now. It is never too late to do something. “
Christine Lagarde She has been President of the European Central Bank (ECB) since 2019 and was previously Managing Director of the International Monetary Fund (IMF).
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