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Climate change is a high risk for the financial sector

22. 4. 2021 | 263 visits

Against the background of a global pandemic, with which countries have been fighting for more than a year, the processes of the climate crisis are constantly ongoing. At the same time, climate stability is important for the functioning of the economy as a whole. The International Monetary Fund anticipates that climate change and changes in natural conditions will have a major impact on the stability of the financial sector, especially insurance. In this context, continued increased systemic risk in the financial sector can be expected. The biggest challenge for today's civilization is to find ways to avert the threats posed by climate change.  

The continuing rise in ocean levels, rising temperatures on the planet, the increase in the number and size of natural disasters and the expansion of uninhabitable areas on the planet can lead to population migration, unpredictable material damage and financial loss. These also manifested themselves in 2020, when there was a significant increase recorded in the costs associated with climate change.

"The costs for dealing with a record number of natural disasters in 2020 was USD 210 billion. Increased expenditures from the state budget and costs associated with insurance against natural disasters will have a significant impact on macroeconomic stability and the stability of the financial sector,” says Juraj Sipko, Director of the Institute of Economic Research SAS and emphasises that, in order to reduce the effects of climate change, international monetary-financial and economic institutions are recommending an increase in low-energy public investment in the various sectors of the economy. At the same time, due to climate change, they anticipate a growing existential risk, for which individual states will have to allocate expenditures in national budgets in the range of 0,5 - 2% of GDP per year. "For comparison, expenditures on research and development in Slovakia in 2019 were at the level of 0,83 per cent of GDP," adds the economist.

According to Juraj Sipek, in order to maintain the sustainability of life on the planet, it is necessary to take into account also the amount of the price for fossil fuels. "Based on empirical studies conducted by international economic and monetary-financial institutions, it is estimated that the total funds related to energy and environmental costs in 2017 totalled USD 5,2 trillion, which represented 6,5 per cent of world GDP," explains Juraj Sipko.

The economist also draws attention to the importance of adjusting CO2 prices so that emissions will be reduced by 80 per cent by 2050. "To meet this goal, prices will need to start at USD 6-20 per tonne of CO2, depending on the individual countries. By 2030, the price should gradually rise to the amount between USD 10-40 and by 2050, it should reach USD 40-150 per tonne by individual countries,” adds the economist, citing Sweden as an example from practice, which has introduced payments for emissions as early as 1991. 

Edited by Katarína Gáliková

Foto: Adobe Stock