Among all the recent criticisms of the Reserve Bank (RBNZ), and there have been a few, the one that probably puzzles me the most is that it, and its Governor Adrian Orr, are wasting their time on the irrelevant, and even political, issue of climate change.
First, a quick recap. The RBNZ has both monetary and financial stability responsibilities. It's also prudential regulator for banks, insurers and non-bank deposit takers such as building societies, credit unions and the few finance companies left taking deposits from the public. Prudential regulation is a legal framework focused on the financial safety and stability of institutions and the broader financial system.
The RBNZ's job with monetary policy is to maintain price stability and support maximum sustainable employment. And we know the RBNZ, and many central banks around the world, are struggling with the first half of that at the moment.
As for financial stability, as the RBNZ's website puts it: "Financial stability means having a resilient financial system that can withstand severe but plausible shocks and continue to provide the financial services we all rely on."
'The biggest challenge we collectively face'
The Ministry for the Environment currently has a draft national adaptation plan open for consultation. When it was released in April, Climate Change Minister James Shaw said the adaptation plan is designed to help communities across New Zealand "adapt to the unavoidable impacts of climate change." The draft plan includes discussion of managed retreat, or moving people, property and infrastructure away from areas at high risk.
In insurer Tower's half-year financial results earlier this year Chairman Michael Stiassny said: "The biggest challenge we collectively face is how we help protect our world in the face of climate change. We are acutely aware of the ways climate change is affecting our communities. Our data clearly shows the frequency of large events and the severity of the damage they cause increasing over time."
And in a recent episode of interest.co.nz's Of Interest podcast, Tower CEO Blair Turnbull spoke at length about the challenge of climate change for insurers. He raised some important issues. A couple were that, after meeting international reinsurers recently they are questioning whether they want to be down under, especially given recent floods in Australia. And that whilst there aren't "uninsurable" areas in NZ yet, there could be in the future.
"We don't have uninsurable pockets at the moment, but if we look forward and these trends continue, that is a risk. So plans like the national adaptation plan, those discussions, the Natural Hazards Bill that's going through [parliament], that's really, really important to now start informing ourselves and responding," Turnbull said.
Parts of NZ are already striving to make themselves more flood resilient, at a cost. Westport is one example.
In the podcast Turnbull also talks about wanting councils to stop issuing consents that enable building in flood prone areas, on top of "a lot of newer subdivisions that are [already] in areas prone to flooding and that are causing problems."
If insurers were to stop insuring houses, or businesses and other property in certain areas, there would clearly be ramifications for banks. In a 2020 Climate Risk Report Westpac NZ went into detail on how these issues affect banks.
“In the next five years, property owners may face insurance premium increases, higher excesses, or exclusions of some hazards. In some cases, property owners may be unable to renew insurance,” Westpac NZ said.
“Higher premiums may impact customers’ ability to service debt, while inability to adequately insure properties could lower their value. This could create a credit risk to Westpac NZ.
A key issue is the mismatch between the terms of insurance and mortgage contracts. Banks issue mortgages on terms of up to 30 years, whereas insurers issue policies annually. A property insurable at the time a bank agrees to secure a 30-year loan against it, may no longer be insurable in 10 years’ time. Insurers are moving, or have moved, to risk-based pricing.
Last year Kiwibank estimated 1.2% of its home lending portfolio was exposed to coastal flood risk, with climate change expected to see this portion rise to 1.8% by 2050. At face value Kiwibank's 1.2% and 1.8% figures don't sound a lot. But exposure levels will vary between banks. And across the banking sector the dollar value of exposures could quickly mount, potentially eating into banks' regulatory capital cushions. As of March 31, NZ banks had $328 billion of housing lending. That's 65% of their total $507 billion of outstanding loans.
In 2019 Local Government NZ suggested up to $14 billion of local government infrastructure was at risk from rising sea levels. Presumably there will be insurance and loans involved with some of that.
Also in 2019 credit rating agency S&P Global Ratings warned banks that don't adapt their business models and lending policies to account for climate change could see their creditworthiness deteriorating quickly. In a report probing whether banks can "weather the effects" of climate change, S&P said the global transition to lower carbon emissions poses a challenge to financial stability, with physical and transition risk for banks, plus operational and credit costs.
NZ banks to be stress tested for climate risks
The RBNZ has said its bank stress tests this year will see it "carry out a series of climate change sensitivity analyses to identify the vulnerability of banks’ lending portfolios to a series of climate shocks. These analyses will focus on the impact of coastal and river flooding effects on mortgage exposures, and the impact of drought and emissions pricing on agricultural exposures. The outcomes will inform a full climate change stress test, which will be conducted at a later date." That doesn't seem an unreasonable thing to be doing.
Other central banks are also looking at banks' and insurers' exposure to climate change. The European Central Bank (ECB) recently undertook a similar exercise. The ECB said the €70 billion of losses from the short-term impact of higher carbon emission prices and extreme weather events, estimated by 41 banks, “significantly understates the actual climate-related risk.”
According to a Financial Times report, the ECB said many of those involved in the test lacked data, had insufficient internal models, and the exercise only covered a third of their total balance sheet exposures. Frank Elderson, Vice-Chairman of the ECB supervisory board, said banks need to work on their capabilities to calculate the risks.
In May the Bank of England suggested UK banks and insurers that fail to manage risks associated with climate change could face a 10% to 15% hit to annual profit.
The path to net zero & 'looking through price shocks'
NZ has committed to reduce its net emissions of all greenhouse gases, except biogenic methane, to zero by 2050, with the backing of both major parties in parliament - Labour and National. Doing this is going to be a massive challenge.
A Ministry of Transport issues paper on what it touts as NZ's first ever comprehensive freight and supply chain strategy, says meeting these goals will require "a drastic transformation" of how our supply chain operates.
"This transformation will include the decarbonisation of all freight modes and the operations of the infrastructure that supports them such as ports and airports. If we do not reduce emissions from our freight and supply chain, it will pose significant economic risks with costs passed onto the consumer," the issues paper says.
One area of inflation stemming from the so-called green transition is likely to involve commodity prices. Commodities such as copper, the key electricity conductor, are likely to face growing demand at the same time the supply of copper, obtained through water intensive mining, faces growing challenges. In a recent episode of Bloomberg's Odd Lots podcast Bob Brackett, a senior research analyst at Bernstein, spoke about this.
"The planet uses about 25 million tonnes of copper a year, of mined copper. Each EV [electric vehicle] we add is about .1 tonnes, 100 kilogrammes. So if we get to a world where every vehicle is an EV, that's 100 million, rounding up, vehicles a year. That's 10 million tonnes of copper."
"So we've got to not only keep the copper demand in the broader economy at that 25 million, we've got to add 10 [million tonnes]. And in a world where we've watched copper grades fall for 100 years, in a world where ESG [Environmental, Social and Governance] issues around local communities saying 'wait a minute, why do I have to bear the brunt of mining to help the EV markets, some electric vehicle in the OECD for example...' There really is a strong mis-match between where that demand could be and where that supply could be," Brackett said.
Speaking last October Orr suggested NZ striving to meet parliament's net zero commitment by 2050, would be a major focus of RBNZ monetary policy, notably its inflation targeting. He said the RBNZ would have to "look through some very obvious price shocks."
"I think there are going to be decades of relative price transitions and it's going to be in part because of regulatory behaviour, but mostly because of climate change itself with farming becoming increasingly difficult in traditional areas, some traditional crops being unable to be grown in places where they're established now, carbon pricing reaching those multiples that we talked about if we don't undertake certain activity."
"These are relative price shocks that can persist for a long time. Already we note impatience even just over the last 12 months of the current price shocks because of Covid supply chain reactions. We've all talked about them, we all knew they were coming, we all said they may be temporary, now the general discussion is 'wow, these are persistent.' And the school continues to be out around some central banks wanting to react, others not," said Orr.
"So imagine that continuing now for the next 20 plus years, that is the world that we will be living in. It will mean that we have to, when we view our monetary policy mandates, we'll have to be really explicit on how we can manage some of these transitions. What does it also mean for the productive capacity of the economy and maximum sustainable employment?"
"We will have to look through some very obvious price shocks. But to the extent that they are persistent and truly changing the price of the basket of goods and services we consume, then there will be monetary policy reactions. So there's not going to be any one resolution, in part around the mandate, in part around the ability to identify one-off temporary versus more sustainable versus generalised inflation. And it's that latter part that we are most concerned with, and some of the price pressures we will see will lead to quite sustained higher generalised prices. We're already seeing that in food prices globally and energy prices, transport, at present," Orr said.
It feels like a stretch to suggest that the RBNZ, overseeing its financial stability and monetary policy remits, and its prudential regulation of insurers and banks, should ignore climate change. Even for a climate change denier, the way NZ - and much of the world is now moving - whilst not fast enough for some people, appears clear. In 2022 a central bank and prudential regulator ignoring climate change would seem extremely negligent.
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47 Comments
Greenflation is inevitable. As other posters will tell you we're deep into overtime with fossil fuels. Huntley's coal fired units are a prime example of the choices we face.
We will either have a price shock or supply shock but we can't continue with "extend and pretend." Given we are increasingly moving to electrification for industry and vehicles I would suggest price shock is preferable as we don't want to become the Sri Lanka of the South Pacific. The price of energy is wrong, it's just too cheap, so we must either subsidise the supply side or accept consumers will be shocked directly.
We are still in the first inning with fossil fuels. Proven reserves have doubled since 1980, the more we consume the more we find. The more we consume, the better the environment, less pollution, safer climate, improved water sources, life is just better. If government would get the hell out of the way and let supply and demand dictate, you will find renewables are unsustainable, unreliable and certainly no replacement for fossil fuels.
Indeed. And just make producers responsible for the clean-up cost of what they produce and let the market decide. Nothing wrong with the market as long as we're not indirectly subsidising others' pollution. Should be user-pays.
Great user name, BTW, having a granny genre fan on here really adds some diversity.
If you are not by now working under the assumption that by the 2030's (at the latest) the whole FIRE economy will be staggering along (at best) under sequential blows from climate change then quite frankly you deserve everything that's coming.
The deleterious effects of climate change should be front and center of the RBNZ considerations. Crikey, the insurance industry has already spelt out in 10 foot tall letters one of the most obvious transmission routes for financial disorder, how much clearer can it get?
The critique hasn't been that the bank should pay zero attention to a potential prudential risk.
The critique instead has been that the bank has paid disproportionate attention to this risk, relative to its core business, and that it's exaggerated the evidence around it.
Are there property loans backed by houses that will be affected by sea level rise over the next century? Yes. Are there any century-long mortgages out there? No.
John Cochrane's talk at the ECB on this stuff was excellent. https://www.johnhcochrane.com/s/ECB_fall_talk.pdf
And while you note the ECB's claiming their stress test undereggs risks, I really think they're overstating that. It's 70 billion euros at risk across 41 banks *with 1.6 trillion euros in assets*. So less than 5%.
And even there it looks ...debatable.
They warn that the numbers would be bigger if combined with a recession; they seem desperate to play the number as a conservative minimum. Their bad scenario was a three-year short-term disorderly transition in which balance sheets had to remain static. To me this looks a lot more like stress testing against crazy policy responses rather than against actual climate change, combined with an assumption that banks are stupid over the next decade. Their scenario has sharp policy responses from 2030, after there hasn’t been enough GHG policy response before then. If banks see this coming, they’d surely adjust balance sheets in preparation. The more likely the bad policy response, the more likely the banks would already have adjusted for it.
And while crazy policy responses are far from unlikely, crazy policy responses can happen across more than just climate.
Where policy risk is the biggest short-term risk, and where it's looking like ag will have an easing in on any climate policy, I'd suggest the bigger risk could yet be around water takes and water quality. How many dairy farms wind up in trouble if any serious price gets put on water takes, or on nutrient outflow?
Are there property loans backed by houses that will be affected by sea level rise over the next century? Yes. Are there any century-long mortgages out there? No.
To be fair, you're really good at these kind of persuasive 'of course this is stupid' sentences. It is only when you backtrack and unpick what you are actually saying that the deception becomes clear. You set-up the feint by talking about sea level rises 'over the next century' (drawing the reader's mind to consider a distant long-term threat) and you then scoff at the idea that anyone has a mortgage that long (century-long mortgages, ha ha ha).
In reality of course the question to consider is this: Are there property loans backed by houses that will be affected by sea level rises or extreme weather events over the next couple of decades? Yes. Are there any decades-long mortgages out there? Yes!
Whether the overall risk is enough to destabilise the banking system is a fair challenge. However, the events of the last couple of years have shown us that climate scientists may have been too optimistic in their forecasts, and the economists informing the IPCC models (Nordhaus et al) have clearly been living in dreamland.
jfoe,
Well put. Crampton is to the Right of the spectrum and numerous studies have found that a much lower proportion of Republican voters in the US accept the reality of climate change compared to those on the Left. I have no doubt it's the same here. What is also interesting is that has little or nothing to do with people's world view. A really good book on this is The intelligence Trap by David Robson.
and that it's exaggerated the evidence around it.
And herein lie the real problem: in my reading of it, climate alarmism has become a fashion.
Ministry for the Environment's guidance manual for local authorities on dealing with coastal hazard risks (2017) recommends using a SLR scenario that equates to the 99th percentile of the worst-case IPCC sea-level rise scenario projection - called RCP8.5. In other words, local authorities are guided to assess the highest of the worst case at the highest range possible.
And moreover, the IPCC's most recent assessment report, AR6 (2021), states that the RCP8.5 scenario is now considered “implausible to unfold” and it is included in AR6 only “for comparison between emission-driven (SSPs) and concentration-driven (RCPs) simulations”. See: IPCC, AR6 WG1, Chapter 4, section 4.4.2. p. 13.
When this most recent update came from the IPCC, a letter was written to James Shaw recommending update of the guidance manual to align NZ policy with the international consensus. He responded that, "Understanding climate risks that we face goes beyond understanding what the "likely" impacts of climate change will be".
Oh really? So, we want to set policy related to managed retreat (the consultation currently underway by government) based on "unlikely" climate events/impacts?
We need some adults in the room.
Hi Eric,
Some more rhetorical questions, while we're on a roll:
- Can markets really credibly price the fallout from polar ice caps melting? No, no they can't.
- Did the economics profession really give their top award to a protagonist who determined that climate change would have negligible effects on economic activity by assuming that about 90% of GDP will be unaffected by climate change because it happens indoors; using the relationship between temperature and GDP today as a proxy for the impact of global warming over time; and using surveys that diluted extreme warnings from scientists with optimistic expectations from economists? Yes, yes it did.
- Should this be mandatory reading for all neoclassical econs and other #experts? Without question.
Not Eric here, but if you search the IPCC AR6 WG1 report - you will soon find that “collapse” very quickly establishes that the science sees this as a low likelihood event this century (and beyond) particularly in the context of SSP2-4.5, the likely emissions scenario for policy purposes.
Regards bullet 2, have you got a link to a reference. I'd like to read up on what you are talking about.
Regards bullet 3 - should what be mandatory reading? Assume it relates to the comment in bullet point 2?
Thanks for engaging, anyway.
On your points:
- I'm not sure we're reading the same report, or really what your point is, or how it relates to the point I was making about the futility of pricing incremental emissions now to avoid catastrophe scenarios driven by irreversible tipping points in climate change? In any case, in its commentary on Arctic Sea Ice melt, para 4.4.2 of Chapter 4 of the IPPC report describes it "as very likely that different trajectories of the near-term evolution of anthropogenic forcing cause distinctly different likelihood ranges for very low sea ice coverage to occur over the next two decades"
- The economist in question was one William Nordhaus; the award was the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. As a highwater mark (pun intended), Nordhaus has opined that 6°C increase will only cause an 8.5% fall in GWP (Gross World Product): "Including all factors, the damage equation in the model assumes that damages are 2.1 percent of global income at 3°C warming and 8.5 percent of income at 6°C warming." (Nordhaus, W. (2018). "Projections and Uncertainties about Climate Change in an Era of Minimal Climate Policies." American Economic Journal: Economic Policy 10(3): 333–360.) The best evisceration I've seen of this outlandish estimate and its utter lack of credible evidential foundation is this article from Prof Steve Keen...
- ...which was hyperlinked in the reference to 'this' in the third bullet point in my previous comment from yesterday.
Sorry, for the late reply. We are reading the same document, You didn't use the word "collapse", so my bad, I thought you were referring to Antarctic ice sheet collapse. Yes, totally agree on Arctic Sea Ice melt - but "catastrophe" should that occur - not so sure. I'll admit I always cringe when those descriptors are used.
I hadn't read Nordhaus, but I did read Steve Keen's article. And yes, it's a very good critique.
Even for a climate change denier, the way NZ - and much of the world is now moving - whilst not fast enough for some people, appears clear.
Very few people deny climate change, it's always changed which is why we have things like continents and mountains and gorges. What some of us do question however is why every climatic event is now weaponised to the point where it's comical. I'll leave you with this, I know a partner in a large firm directly consulting on this topic who has just bought his second waterfront home.
Exactly. Banks still lend to Beach Front Buyers .
First it was Global Warming. People did not buy into it. So lets change the name.
Second it was Climate Change. People did not get fooled by the name change, so lets make it sound more scary with another name change.
Thirdly lets call it Climate Emergency. What a Joke ! The Climate has always been changing, stop trying to make money out of us.
I saw an example recently where a UK TV weather report from 2017 and from 2022 were compared. Both had broadly similar summer temperatures of between 23c and 27c, the 2017 version had a blue shaded UK while the 2022 had a red shaded UK.
I have no issue with reducing CO2, but I cannot abide the barely concealed vested financial interests and climate alarmism. No socratic person should.
I also note the same people seem to share little concern with the likes of single use plastics, fish stocks, water quality. Perhaps there isn't the ROI in these?
TK - no, you'd done exactly whay Crampton (predictably) did. It sounded like a return of service, but was anything but.
Let us be very clear: this is a physics problem. An easily defined one, at that. Anthropogenic FORCING of the climate, is undeniable (you were fudging too obviously). Your final comment is no better - low-grade spin; you make no mention of which angle the person is coming from. Obfuscation on behalf of farmers, perchance?
Even is it weren't by CO2/greenhouse effect, it is happening via low-grade heat:
https://dothemath.ucsd.edu/2012/04/economist-meets-physicist/
And the inevitable nonsense from an economics-blinded person:
https://www.forbes.com/sites/timworstall/2012/04/12/economic-growth-wil…
Te Kooti,
"Very few people deny climate change, it's always changed which is why we have things like continents and mountains and gorges".
Perhaps I'm wrong, but that sounds like " I don't believe in anthropogenic climate change". It's actually not that long since continental drift was very contentious, but no longer.
Let me explain very briefly. The big difference between what is happening now and the enormous changes the world has undergone over many millions of years is its speed. If you are sufficiently interested, i would be happy to explain this in some detail.
Does the RBNZ have trained officers to challenge this person?
‘Greenhouse Gas Effect Does Not Exist,’ a Swiss Physicist Challenges Global Warming Climate Orthodoxy
So why are we subsidising EV's?
Rather, cycle ways, footpaths and planning that eliminates the need for a mindless daily commute.
Or perhaps a training institute where the public can learn how to use their legs. Once formerly accredited, the legger could get a subsidy on every step taken.
https://radioadelaide.org.au/2022/08/02/mangroves-killed-by-climate-cha….
Climate scientists have always said there will be extremes both ways , caused by Global warming. Since the late eighties or so , coming up 40 years now. I have yet to see a case where they have been proven wrong.
I have yet to see a case where Climate scientists computer models have made one accurate prediction. Especially models predicting the future based on CO2 emissions.
Examples are everywhere. Expert Paul Ehrlich says in 1971, "By the year 2000 the UK will be simply a small group of impoverished islands, inhabited by 70 million hungry people. In 1986 Dr. James Hansen said, "the greenhouse effect will make global temperatures rise well above any level experienced in the past 100,000 years, early in the next century". University of California physicist John Holdren in 1986 said, "it is possible that CO2 climate induced famines could kill as many as a billion people before 2020.
Yes and we have John Kerry, the the USs/Bidens climate czar owning his own private jet, a few cars (I doubt whether they are all EVs) and other properties.
Obama installing about 10,000l of back up gas for his mansion NE of New York, Martha's Vineyard – an affluent island located south of Cape Cod in Massachusetts.
The expansive 6,892-square-foot house sits on nearly 30 secluded acres fronting the Edgartown Great Pond between Slough Cove and Turkeyland Cove, with views of the Atlantic ocean.
I was thinking more about his anti-fossil fuel stance and then goes onto apply for gas storage facility, rather than sea level rise. I did sometime ago check out the elevations of his property and would have to be a large 2m rise to be affected. Sea level rise a non issue for his property. Followed up from some rant about him.
In my opinion, the RBNZ has more than enough on its plate managing the monetary environment.
If climate changes threatens the banking system, then that is a long-term issue with huge uncertainties as to how that might play out.
Best to leave climate change issues to the Government and the Climate Change Commission to wrestle with.
If climate change does threaten the banking system, then when that happens is the time for the RBNZ to act on that threat. But that situation is not with us right now.
And threats to the banking system can come from many directions. History would suggest that wars and populist governments are the big monetary destabilisers.
KeithW
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