ECB Says Ignoring Climate Change May Decimate Europe’s Economy
A failure to introduce policies to mitigate climate change could significantly lower Europe’s economic output by the end of the century, according to the European Central Bank.
If no regulation is enacted and natural disasters become more frequent and severe as a result, the region’s gross domestic product could decrease by 10% by 2100 compared to a scenario where governments act, the Frankfurt-based institution said in the results of its first-ever economy-wide climate stress test.
The ECB also said that even a disorderly transition to a more sustainable economy -- featuring delayed, abrupt policy action and higher risk of disasters -- would still be less costly than not acting at all.
“Without policies to transition to a greener economy, physical risks will increase over time,” ECB Vice President Luis de Guindos said. “They will increase non-linearly, and due to the irreversible nature of climate change, this increase will continue over time. It is essential to transition early on and gradually.”
The ECB is pushing companies and banks to understand and manage environmental threats and the possibility that polluting firms will go out of business. On top of its economy-wide climate assessment, the ECB will also conduct a bank-specific stress test next year.
Other findings from its assessment published on Wednesday include:
- The average corporate-loan portfolio of a euro-area bank is 8% more likely to default in 2050 under a scenario where climate change is not addressed than under an orderly transition
- Portfolios most vulnerable to climate risk are 30% more likely to default in 2050 compared with 2020 under a no-transition scenario
- Bigger banks hold over 50% more exposures to companies that are highly vulnerable to climate risk than smaller lenders
- Banks located in southern European countries such as Greece, Cyprus, Portugal, Spain and Malta are significantly more exposed to companies that face high physical risks
- The top 10% most polluting portfolios finance almost 65% of total emissions and 4% of banks finance about 45% of all emissions
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