Opening remarks by Mārtiņš Kazāks for expert discussion on ensuring sustainable development and financial sulutions for climate change mitigation (2 October 2020)
Ladies and gentlemen,
when faced with a challenge, it is good to listen to scientists. Not because they know everything, but because they usually know more than anybody else about a given subject. Take the coronavirus. While virtually the whole world has been affected, those countries that relied on epidemiologist advice and acted quickly and decisively have generally fared better than those dragging their feet, questioning or denying science.
The same goes for tackling climate change, which in all likelihood will be the biggest challenge of our lifetime. With respect to it, we are all even more in the same boat. Although the coronavirus knows no borders, we can stop humans who carry the virus at the borders. But we cannot stop Co2 molecules at the borders. Thus, if we wish to shape a better future, we have to listen to scientists and act accordingly.
So, what do the scientists say? They tell us that if we just carry on business as usual, life on our planet already during the second half of this century will become quite unbearable for humans. Extreme weather events will become more widespread and more frequent and will threaten our lives and well-being. In other words, risks associated with climate change will increase exponentially. I might not be around for most of the second half of this century, but my children will. Thus, like many of you, I still have a personal interest to do whatever it takes to prevent such a scenario.
The climate scientists tell us that we had to act when I was a child. We start acting just now and this means more profound changes to the way we live. The short-term impact of COVID-19 aside, the Co2 emissions generated by human activity still keep increasing, but in the future they will have to decrease dramatically. The carbon intensive activities of today will have to reduce their carbon footprint severely or give way to low carbon activities. This will radically change our individual lives and lead to a profound structural change in the economy compared to which the adjustment recently imposed on us by the coronavirus will look relatively minor.
The need to reduce our carbon footprint will affect everything. It will affect how and how often we commute, where we work and what we eat. It will affect the balance of savings and investment globally, posing new challenges for monetary policy. It will affect the labour market. Industry structure will change, and massive retraining will be required where jobs in the carbon intensive activities are lost. Ensuring that the newly created jobs are at least as productive and well paid as those lost will not be easy.
How can we facilitate the transition to a way of life and economy with a reduced carbon footprint? Here it is also worth listening to scientists, in this case economists. The world’s leading economists increasingly admit that the right policy would consist of both a green investment push and substantially increased price for the negative externalities caused by Co2 emissions. One will not work without the other. Raising the price of carbon emissions would harm economic growth and hamper recovery after the COVID-19 shock. Facilitating green investment alone would not sufficiently reduce the carbon intensive activities.
In addition, it is important to ensure that the green transition does not increase inequality. If the rising carbon taxes hit the poor disproportionately, the transition will not be just. What is more, it will not be politically feasible. A possible solution is redistribution of a part of the additional revenue from increasing carbon taxes in targeted support to lower income households.
This is a global problem. And the European Commission has put forward an ambitious vision, namely, to make Europe the first climate neutral continent by 2050. But in order to avoid the vision turning into a hallucination, a lot of work needs to be done, and as always, the devil is in the detail. Given my academic background, I would allow myself to add that it is also important to agree on definitions. In this respect, the development of an EU taxonomy of sustainable activities is the first step.
As regards Latvia, it is important, in my opinion, to point out that the European Green Deal concept is considerably wider than what we are used to understand by green in Latvia. The European Green Deal means sustainability including the environment (i.e. ecology, nature), the society (i.e. demography, poverty, health, education), and the economy (inter alia digitalisation, energy, the financial sector). It is a holistic approach enabling Europe to be better prepared and to enter the future with a higher level of productivity.
Why are central banks discussing climate change? Why is Latvijas Banka hosting the event on sustainable finance organised by Finance Latvia Association today? Because the green transition will affect not only the Latvian society where we belong, not only the Latvian economy we analyse and support with monetary policy and advising the government, but will also affect directly our core business and goals. I already mentioned one of them – it will affect the business environment for our monetary policy. How will the interplay of monetary policy with fiscal and other policies change on our road to climate neutrality? How will financial stability be affected? How will the value of assets, e.g. real estate change? How should we manage our portfolio of financial assets to both facilitate the green transition and maintain an adequate balance between risk and return? You never know, green bubbles also may burst. What new statistics do we need to collect? And last, but not least, how do we incorporate the climate issues in the financial literacy programmes for schools and the general public? We in Latvijas Banka will develop our green or sustainability strategy and define our role in Latvia’s economy on the road to the green economy.
To look for answers to such questions, central banks and financial regulators have created the Network for Greening the Financial System, of which Latvijas Banka is also a member. Environmental sustainability issues are also an integral part of the monetary policy strategy review of the Eurosystem that was launched this year. However, we all are also only at the beginning of the road.
I hope that together we can find some answers to our questions today.
I look forward to learning from you today.
Have an awesome conference.