Rosanna Costa: Implications of climate change and ecosystem
services degradation for macroeconomic and financial stability
Opening remarks by Ms Rosanna Costa, Governor of the Central Bank of Chile, at the
XXV Annual Conference of the Central Bank of Chile, Santiago, 27 November 2023.
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Welcoming
Good morning to the speakers, discussants, and everyone who is here attending in
person and to those who are following us via streaming. We welcome you to the
twentysixth Annual Conference of the Central Bank of Chile entitled "Implications of Climate
Change and Ecosystem Services Degradation for Macroeconomic and Financial
Stability."
Let my first words be to thank the team that has worked very hard to make this event
possible and that has arranged the magnificent line-up of speakers and discussants
that we will have over these two days.
Motivation and Context
Over the last years we have seen dire warnings of the deterioration of nature and its
consequences. We have witnessed record temperatures in many countries, reduced
river levels, devastating fires, droughts, and extreme weather events. In parallel, we
have seen a severe disruption of multiple ecosystems around the world and massive
loss of wildlife.
In this context, on the one hand, several scientific publications draw attention to what is
happening and predict the outlook to be far from auspicious. The latest reports on
climate change and biodiversity by the IPCC and the IPBES show that we are running
very short on the commitments made to halt the damage to nature, thus risking the
crossing of multiple tipping points which can have consequences on our societies. On
the other hand, policymakers, businesses and households, are increasingly taking
actions to reduce their impact on the nature and driving a transition to a sustainable
economy.
All these activities and climate change itself have repercussions on the economy, the
financial system and the welfare of society. The natural question that arises is: how is
this challenge being addressed by central banks?
Not all central banks have the same mandates or economic tools, but there are several
common areas in which our institutions should advance and contribute towards a more
sustainable economy, always respecting our mandates, objectives, and activities. But it
should be mentioned that our role is not to be a climate policymaker. In other words,
central banks are not here to provide recommendations or enact policies to safeguard
the environment.
In fact, at the Central Bank of Chile we do not have an explicit mandate regarding
climate change. Our goals established by law are to look after the stability of the
currency and the normal functioning of internal and external payment systems. And,
from my point of view, it is fundamental for an autonomous institution such us ours, to
be cautious in exercising our attributions and to do our job carefully and well.
In this sense, to achieve our objectives, we must consider the environment in which we
operate. For example, we need to understand the macroeconomic implications of
climate change when assessing our economic and financial outlook, highlighting the
relevance of developing models that incorporate this aspect into our projections. These,
in turn, will allow us to be convinced of the correct internalization of the risks associated
with climate change that impact the financial system. Therefore, we must be able to
measure well and generate statistics that will enable us to evaluate and make good
decisions. In other words, we need to know, measure, anticipate, and certainly share
that knowledge if the policy maker so requires.
Thus, and, in line with Network for Greening the Financial System (NGFS) commitment,
as a central bank we are taking action by designing a work agenda on these topics. The
details of this effort are part of our 5-year planning cycle, that began early this year.
We stress three main lines of action: macroeconomic analysis; financial risk
assessment; and the provision of economic and environmental statistics. The
knowledge and the generation of information of the effects of climate change on the
economy and the financial sector are central for a correct evaluation of economic
policies.
The macroeconomic implications of climate change include some well-known elements
for monetary policy, such as supply shocks, structural changes and uncertainty. But in
this case, the changes may occur over an extended period, beyond what is a normal
business/policy cycle.
One of the most immediate challenges that central banks face is factoring into their
analysis and projection models the macroeconomic impacts arising from the physical
damages related to climate change and environmental degradation, as well as the
transition effects associated with mitigation and adaptation policies that might be
implemented. Certainly, the analysis of climate change and transition policies poses big
challenges, but central banks have a comparative advantage given their expertise
accumulated in the last few decades in terms of data-driven structural modeling.
Our medium-term research agenda will incorporate climatic and, more broadly,
environmental concerns into its standard toolkit for macroeconomic analysis, including
the effects of physical and transition risks, as well as new opportunities presented by
the green transition. All the above is in line with our commitment with NGFS. These
tools will be used mainly to assess the implications of environmental degradation and
the green transition on long-run potential growth.
Another challenge is safeguarding the long-term stability and resilience of the financial
system through two main lines of action: 1) incorporating climate risks into financial
stability assessments to identify and address vulnerabilities in the financial system; 2)
enhancing risk management and supervision practices to take into account climate
risks. The impact of climate change on the economy exacerbates traditional financial
risks.
Plus, our functions include the production of key macroeconomic statistics. A
comprehensive analysis of the impact of climate change and ecosystem degradation
requires consistent, comparable and quality statistics to close data gaps and include
nature in the decision-making process of the different actors.
We plan to contribute by producing information and analysis for climate risk
assessments that complement the efforts of, and are an input to, the financial regulator
and can serve as a guide to other financial institutions and businesses. A first step in
this line was the exposure analysis to physical and transition risks of climate change
published in the Financial Stability Report during the first half of 2022.
We also are working on developing methodologies for measuring Chile's natural capital,
in line with the framework derived from the United Nations' System of Economic and
Environmental Accounting. Natural capital can be systematically measured and
monitored based on its contribution to production and societal well-being. Additionally,
we are working on other climate-related topics, such as the estimation of the carbon
footprint of economic activity by using the Input-Output model, and we are studying the
factors influencing its evolution.
Besides these initiatives, we have related activities. Internationally, as an active
member of the NGFS, we are co-chairing the macro modeling group within the
Workstream of Monetary Policy, and part of the Taskforce for Nature-related Risks and
the Research Network. We are also chairing a Research Network including many
countries in the Americas on the macroeconomic consequences of environmental
change with the support of the BIS.
At home, we are supporting some governmental instances to work on these issues as
external advisors. For example, since 2019 we have been part as an advisor to the
Green Finance Roundtable and the preliminary-Committee in Green Taxonomy,
created by the Ministry of Finance. Additionally, we are also a member as an external
advisor to the Natural Capital Committee formed by the Ministry of Environment, the
Ministry of Finance, the Ministry of Economy and the National Council for Science,
Technology, Knowledge and Innovation. This committee is an instance of collaboration
between institutions that aims to develop methodologies to measure the real value of
the multiple services that our ecosystems provide us every day.
Conference contents
The fact that our annual conference will be dedicated to addressing issues on this topic
this year is proof of our interest in building a better understanding of these phenomena
and learn about the challenges and opportunities associated with possible future
environmental scenarios and their associated macroeconomic impacts.
This conference seeks to answer questions such as: What are the main mechanisms
through which nature degradation and climate change can affect long-term growth?
How does macroeconomic and financial stability depend on ecosystem services and
climate stability? and What methodologies and tools are available to incorporate
naturerelated risks into standard macro-financial analysis? among others. To answer these
questions and shed light on the future we have gathered a select group of experts.
Thus, today we will have two academic sessions with papers studying different aspects
of the macroeconomic impacts of climate change and ecosystem services degradation,
we will have Philippe Aghion as Keynote speaker, and we will end the day with a
discussion panel talking about policy implications.
In the first session, James Stock will talk about how both physical and transition impacts
related to climate change can be incorporated into macroeconomic models and what
insights we can get from these integrated kinds of models. Anthony Smith will then talk
about how a global economy-climate model featuring a high degree of geographic
resolution can shed light on the uneven distribution of the climate change impacts
around the world. Also, Luigi Durand will discuss how, through international trade,
policies implemented in one country can affect the evolution of the natural capital of
other countries. This session will have two amazing discussants: Benjamín García and
Larry Karp.
Today's keynote speaker, Philippe Aghion, will then tell us about whether it would be
possible to achieve a green transition process that reduces CO2 emissions and, at the
same time, enhances economic growth. Then, the second academic session of the day
will be started by Steve Polasky, who will talk about to integrate ecosystem services
into economic models and the policy implications resulting from such integrated
framework. The second speaker of this session is Justin Johnson, who will discuss
what are the policy recommendations from an earth-economy model to achieve global
sustainability. We will have two extraordinary professors discussing Steve and Justin ́s
presentations: Francisco Gallego and Andrew Plantinga.
We will end this first day with a discussion panel, in which we will listen to Marshall
Burke, Douglas Arent, and Eduardo Cavallo about what they consider the relevant
macroeconomic implications of environmental degradation that policymakers should be
aware of. They will also discuss the opportunities and challenges posed by the
investment projects required to achieve the green transition and mitigate the damages
that we are already experiencing and expect to intensify in the near future.
Tomorrow, we will open the discussion with an academic panel focused on the financial
implications of environmental degradation. In this session, Hyeyoon Jung will tell us
how insurance companies can be exposed to climate-related physical risk through their
operations and transition risk through their financial asset holdings. Then, Johannes
Stroebel will discuss how physical and regulatory risks related to biodiversity loss can
affect economic activity and asset values. As discussant of this session, we will hear
from Katherine Wagner and Mauricio Larraín.
Following this, we will have the pleasure of hearing the keynote speaker of this second
day, Maximilian Auffhammer, who is also a co-organizer of the conference. He will talk
about key issues related to the physical and transition impacts of environmental
degradation. Then, in the fourth and last academic session of the conference, we will
have the privilege to hear from Tamma Carleton about new approaches to estimate the
social cost of carbon; from Marshall Burke, who will discuss the channels through which
climate change can lead to socio-economic issues affecting economic growth, and from
Elías Albagli who will speak about what the past tells us about the relationship between
emigration and climate change, what the present tells us with the current available data,
and what we can expect for the future under different possible scenarios. In this session
we will have Joaquín Vial, Klaus Schmidt-Hebbel and Anouch Missirian as discussants.
Finally, we will close the day and this Conference with a discussion panel from
highlevel
policymakers, as Charlotte Gardens-Landolfini, Mauricio Larraín, Marcus Molbak and
Daniel Santabárbara, about the impact of climate change on financial stability.
Closure
I hope the expertise and insights of our distinguished speakers and discussants provide
invaluable guidance on how to navigate the very challenging climate and environmental
transitions that we urgently need to address.
I wish all of you a fruitful two days in this conference. Thank you.