Egil Matsen: Climate change, climate risks and Norges Bank Speech by Mr Egil Matsen, Deputy Governor of Norges Bank (Central Bank of Norway), at Norges Bank, Oslo, 8 November 2019. * * * Accompanying charts of the speech. Introduction This autumn, news reports have included a hurricane in the Bahamas, a typhoon in Japan and large-scale wildfires in California. Many lives have been lost, and the economic losses have been substantial. While we should be cautious in attributing single weather events to global warming, climate research points towards an increase in extreme weather events and natural disasters in the years ahead. What we have seen so far may be a forewarning of what is to come. Chart: The temperature is rising Global warming is one of the greatest challenges of our time. The global average temperature has increased by about 1 degree Celsius above pre-industrial levels. It is widely accepted that climate change is largely human-induced. Greenhouse gas emissions must be drastically reduced if the temperature goals of the Paris Agreement are to be reached. Putting the necessary measures in place has proved to be demanding. From an economist’s standpoint, a carbon tax would be the most effective way to reduce greenhouse gas emissions – the polluter must pay. However, carbon taxes and other measures are often met with opposition. Costs are imposed locally, while the gains from lower emissions are enjoyed by all. The temptation is to be a free-rider. In addition, the consequences of current emissions will largely be borne by future generations.

Climate policy measures, changes in public attitudes and the emergence of more 1/7  BIS central bankers' speeches  environment-relatedly friendly technology will have an impact on both production methods and consumption patterns. This will create both opportunities and challenges for the business sector. Not all companies will make the transition to a low-carbon economy. Others will benefit from the restructuring involved, and new companies and industries may emerge. It is uncertain which climate policy measures will be introduced ahead, particularly internationally. If little is done in the short term, economic decisions today must take into account that climate policy may be abruptly tightened later. Postponing climate mitigation measures will also increase the risk of severe and irreversible climate change in the future. Responsibility for achieving the Paris Agreement’s goals lies with the political authorities. However, we already know that climate change and adjustments to a low-carbon economy will affect large parts of the economy. Norges Bank is responsible for maintaining price stability and the stability of the financial system. In its conduct of monetary policy, the Bank also promotes high and stable employment and output. The Bank is also tasked with managing the Government Pension Fund Global (GPFG) and is thereby a major investor in global capital markets. A feature common to these tasks is the identification and management of uncertainty and risk. Climate-related economic and financial risks have important implications for all of Norges Bank’s operations. Climate change and climate risk must also be taken into account by central banks.