Per Callesen: The role of financing and regulation amid broader
policies to mitigate climate change
Speech by Mr Per Callesen, Governor of the National Bank of Denmark, at the Green Climate
Fund's 2019 Private Investment for Climate Conference, Seoul, 8 October 2019.
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Thank you for the invitation. It is good to be back at the GCF. 2011-2014, I served as a member
of the Transitional Committee and the Board. Today, I will focus on the role of financing and
regulators in the context of broader policies to mitigate and adapt to man-made climate change.
This past year has seen stronger engagement in climate issues around the world. This is most
welcome. There has been better engagement by the financial industry. Central bankers and
financial regulators are now involved in addressing climate-related financial risks. The climate
challenge is so large that all players in our economies, all areas of policy, and all countries in the
world will have to deliver and push in the same direction.
We need to be aware of the context. Others are better placed to consider developments in
emissions and the setting of targets for future reductions. My perspective is the policies needed
to meet objectives.
I remember the early 1990s, almost thirty years ago. We understood the climate impact of CO2
emissions, and we began assessing how economic scenarios affected emissions. The policy
implication was pretty clear: Announce a credible path of gradually increasing carbon pricing to
set expectations right without affecting already undertaken investments by firms and households
too much. That has not happened.
An appropriate pricing of fossil fuels, in line with the true costs of CO2 emissions, would still be
the most efficient driver of the needed climate-friendly innovation, investment and behavioural
change of billions of people and hundreds of millions of firms. That behavioural change is needed
to incentivise the rolling out of existing and upcoming technologies. We need more information on
policies setting emissions, country by country. But we know that the current average direct global
price of carbon is 2 USD per ton, approximately zero. Only about 20 per cent of global
greenhouse gas emissions are covered by a carbon price. Only a fraction hereof is priced at
levels consistent with the Paris Agreement. The price of most CO2-intensive products, such as
oil, gas and electricity, etc., is in some cases raised by close proxies of direct carbon pricing,
such as fuel taxes. In other cases, the price of such products is reduced by fossil fuel subsidies.
Likely, the net impact of taxes and subsidies is close to zero.
The absence of any significant carbon pricing has implications. First, it will be significantly more
difficult to cut emissions in the absence of spectacular technological advances, which we yet
have to see. Second, in addition to the cost implied by physical effects of climate change - such
as flooding and droughts - the economic cost of mitigation will be substantially higher than if
driven by price incentives. Regulated energy and emission standards have a significant potential,
but are less efficient. Third, we have to hope, if we do not promote, that technological advances
have a climate-friendly bias. This may well have been the case in recent years as the costs of
renewable energy and energy savings have come down substantially and are now competitive.
But many of us underestimated the technological advances also taking place in the extraction of
fossil fuels, such as shale gas and deep water drilling.
As regards financing, climate-friendly investments would have been more attractive in a world of
appropriate pricing and regulation of carbon. The absence of such policy action implies that we
cannot expect financing to deliver as much as we would like. Attracting financing on a large scale
requires a strong enabling environment. Investors seek the highest risk-adjusted return. But the
financial sector and financial authorities can and should nevertheless complement the fight
against climate change, also with current public policy settings.
What are the opportunities from the financial sector perspective? First, lots of profitable
climatefriendly investment projects exist already. Some on a large scale. In my country of origin,
Denmark, we have numerous encouraging examples of companies and institutional investors
contributing to and benefiting from the transition to a low-carbon economy - both at home and
abroad. Others on a small scale; simple efforts to save energy in households and firms. Note
that the low interest rate environment has shifted the investment balance in favour of upfront
efficient capital and against outlays for energy year after year. Second, the financial sector has to
care about reputational risks. It will get questions from customers and the media. Banks begin to
check companies for their ESG strategies before lending, out of concern for both risks and
reputation. Third, the financial sector should prepare for potentially stronger climate-friendly
policies set by governments down the line.
Obvious and profitable climate-friendly investment needs often exist in areas of the world with
difficult physical, economic or regulatory environments. Such barriers can be reduced with
technical assistance. These are areas where also the GCF and other international financing
institutions can have an important positive impact. I am encouraged by what I have learnt about
the GCF activities since I left in 2014, and share the strong plea that all countries scale up their
support for the GCF.
What is the role of central banks and financial regulators as regards climate change issues? The
Network for Greening the Financial System, NGFS, is a recognition of the need for global
collective leadership and co-ordinated action to effectively mitigate and adapt to climate change.
Central banks and financial supervisors take part, and my central bank is a member. We are in
particular aiming to improve our understanding of how climate-related risks may impact the
financial system and the wider economy. Many questions have yet to be answered, but we are
working to map the implications of climate change to better safeguard the financial system
against these risks.
Climate-related risks are unlikely to be sufficiently reflected in financial balance sheets and asset
prices. This is the case for both physical and transitional risks. Physical risks relate to for
example droughts or flooding, while transitional risks arise from policy changes and technological
advances which may inter alia shift the prices of assets, leaving some stranded. By nature, the
impact of transition risks will increase, the more abrupt the transition to a low-carbon economy
takes place. The longer we delay, and we are very late by now, the more abrupt these changes
will have to be. The more abrupt change, the more pronounced the potential effect on the
financial system. Risks should be addressed prudently from a financial stability perspective.
Neither green nor brown investments and loans should receive special treatment which would
undermine the credibility of risk weights. Rather, we should ensure that exposure to actual risks
from climate change and the necessary climate-friendly economic restructuring is correctly
accounted for. This would also send a strong signal to those who seek finance for their
activities.
In conclusion, none of us - neither in the public nor private sector - can afford to overlook the
risks associated with climate change as well as the need for immediate and effective policies
and action. The financial sector can supplement fiscal and energy policies to fight climate
change. But be careful that those who set fiscal and energy policies do not come to think that
financial institutions, central banks and supervisors can substitute for their efforts. We all have to
push and pull in the same direction. Thank you for your attention. I am looking forward to
engaging with all of you at this conference.