How the Riksbank can contribute to climate policy

3 March 2020

Anna Breman

Deputy Governor

Robur et Securitas – Strength and Security

Carbon dioxide concentrations in the atmosphere over the last 800,000 years

Carbon dioxide in the atmosphere over the last 800,000 years. Year

zero represents 2019.

Source: Lüthi, D., et al., 2008 supplied by NOAA NCEI Paleoclimatology

Program

Parts per million (ppm)

2019: 408.55

150

200

250

300

350

400

450

150

200

250

300

350

400

450

800 738 685 597 547 470 355 260 164 58 9 0

Thousands of years

Carbon dioxide in the atmosphere

The climate and its effect on the economy and the financial system

Climate-related risks can affect monetary policy – three different scenarios

What can the Riksbank do to contribute to more sustainable development

By how much will emissions increase? – two scenarios

The concentration of carbon-equivalent greenhouse gases in the

atmosphere in two of the IPCC’s scenarios, RCP 8.5 (continued carbon

emissions) and RCP 4.5 (reduced emissions).

Source: RCP Database (Version 2.0.5)

Parts per million (ppm)

0

200

400

600

800

1000

1200

1400

0

200

400

600

800

1000

1200

1400

1950 1970 1990 2010 2030 2050 2070 2090

Historical emissions Continued emissions (RCP 8.5) Reduced emissions (RCP 4.5)

Substantial uncertainty over the effects of climate change

The graph shows the change in temperature, precipitation and sea

level in the two IPCC scenarios. The figures illustrate the maximum,

minimum and mean values.

Sources: SMHI scenario data and SMHI Klimatologi no. 41.

+7.9

+5.9

+4

+41.4

+27.1

+17

Change in relation to the mean value

(1961-1990), %

Change in relation to the mean value (1961-1990),

degrees C

Change in relation to the mean value (1986-2005),

cm

PRECIPITATIONTEMPERATURE SEA LEVEL

+66.4

+42.4

+21.4

+3.8

+3.1

+2.3

+39.1

+18.5

+8.2

+39.4

+21.4

+4.4

Climate change affects the economy

PHYSICAL RISK

Gradual global warming Extreme weather events

TRANSITION RISK

Adaptation to less fossil-based economy

Climate taxes Tougher regulation Changed consumption

patterns

COMPANIES, AGRICULTURE AND

HOUSEHOLDS

FINANCIAL INSTITUTIONS

Tighter insurance requirements

Investment losses

Credit losses

Increased risk weights

Lower productivity

Falling asset prices

Lower profits

Adaptation to a less fossil-based economy is already under way

Source: Macrobond

Index 1 January 2008=100

0

50

100

150

200

250

0

50

100

150

200

250

08 10 12 14 16 18 20

S&P 500 Dow Jones Oil & Gas Dow Jones Coal

Climate policy should be designed to avoid extreme outcomes

Climate system particularly complex – substantial uncertainty and risk for extreme outcomes with huge costs

Decisions shrouded in uncertainty – “Good decisions on average” or “avoid really bad outcomes”

Insurance perspective – we should insure ourselves so that we avoid and reduce the consequences of extreme outcomes

The climate and its effect on the economy and the financial system

Climate-related risks can affect monetary policy – three different scenarios

What can the Riksbank do to contribute to more sustainable development

Climate change can affect monetary policy –three scenarios

A temporary supply shock

A slow structural change

A severe economic crisis

The monetary policy toolbox is not exhausted

• Loans to financial institutions to provide liquidity in a crisisLiquidity support

• But the interest rate is close to its effective lower boundPolicy rate

• Purchase of housing and corporate bonds

• “Forward guidance”

• Loans to companies via banks

• Foreign exchange interventions

Other measures

Purchase of government bonds swells the Riksbank’s balance sheet

Source: The Riksbank

SEK billion

FX reserve

Gold

Other assets

SEK portfolio

FX debt

Notes and coinsOther liabilities

Market operations

Capital

0

100

200

300

400

500

600

700

800

900

1 000

31 December 2019

Assets Liabilities

The climate and its effect on the economy and the financial system

Climate-related risks can affect monetary policy – three different scenarios

What can the Riksbank do to contribute to more sustainable development

The Riksbank’s role in climate work

Research and analysis

Financial sector regulation

The Riksbank’s balance sheet

Minor losses with a high carbon tax

Source: Hassler, Krusell and Olovsson (2018)

Per cent

0

5

10

15

20

25

0

5

10

15

20

25

2010 2050 2090 2130 2170

High tax when a low tax is correct Low tax when a high tax is correct

The Riksbank’s role in climate work

Research and analysis

Financial sector regulation

The Riksbank’s balance sheet

How sustainable are the foreign exchange reserves?

Direct greenhouse gas emissions, excluding uptake and emission of

greenhouse gases from land use, GHG (kt CO2e)/GDP (USD million).

Sources: UNFCCC, OEDCD and Climate Watch.

.

Emissions as a share of GDP

0

0,1

0,2

0,3

0,4

0,5

0

0,1

0,2

0,3

0,4

0,5

In the foreign exchange reserves

Potential holdings

Scope to broaden bond purchases

Sources: SCB, Kommuninvest, Covered Bond Label and the Riksbank

Outstanding volume of bonds issues in SEK millions

0

500

1000

1500

2000

2500

3000

3500

4000

0

500

1000

1500

2000

2500

3000

3500

4000

2013 2014 2015 2016 2017 2018 2019

Housing bonds Government bonds Corporate bonds Municipal bonds

Central banks need to take the climate issueseriously

• Independence of the Riksbank

• Focus on both business cycle and structural changes

• The Riksbank is taking the climate issue seriously

From here strength and security

• Central banks can contribute the means within their mandates

Global price on carbon dioxide is the

highest priority

• Research and analysis

• Cooperation with other authorities and international networks

• Continue work to review our assets

The Riksbank’scontribution

Thank you!