OTTAWA – The fallout from climate change and the actions needed to deal with it are poised to have “material and pervasive” effects on the economy and its financial system, a senior Bank of Canada official warned Thursday.
The transformation to a lower-carbon economy will have important consequences for both aggregate supply and demand, deputy governor Timothy Lane said in a speech.
And Canada, he predicted, is positioned to feel it more acutely than most.
“Make no mistake: the move to a lower-carbon economy is a major structural shift for the global and Canadian economies,” Lane told a Montreal audience.
“Adapting to a lower-carbon economy will likely mean more profound structural changes for Canada than for other countries.”
Canada, he added, is a major producer of fossil fuels and its factory sectors — like autos and aerospace — are closely tied to energy.
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Lane also noted that Canadians use more energy per capita than many around the world because of their country’s cold climate, their high living standards and their lifestyles.
Still, Canada has some advantages, he said.
He said it’s already a big producer of renewable energy and it boasts a highly educated population with the capacity to develop green technologies.
If done right, Lane said carbon pricing and initiatives that ease the flow of private-sector cash into environmentally sustainable investments can do a lot to help address climate change.
On carbon pricing, he said governments can use carbon-tax revenues to lower taxes elsewhere as way to limit the added economic burden on households and businesses. He also said this approach can partly address concerns about lost competitiveness due to carbon pricing.
Lane added that he believes “green finance” has the potential to become a key part of mainstream finance.
The complexities associated with climate change won’t be easy to navigate, he said.
“Climate change itself and actions to address it will have material and pervasive effects on Canada’s economy and financial system,” Lane said.
In recent years, he argued that the resource-dependent Canadian economy has also proven itself to be resilient, particularly during its adjustment to the downturn in commodity prices in recent years.
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Canada has also already rebounded from the economic toll of extreme weather events.
As an example, Lane pointed to last spring’s huge wildfires that disrupted Alberta’s economically crucial oil-producing region. The blazes, which forced the shutdown of major facilities, was so significant it slashed overall Canadian economic growth in the second quarter by about one per cent.
In his speech, he cited 2011 estimates that predicted without actions to address global warming Canada would be slapped with additional annual costs between $21 billion and $43 billion by the 2050s.
He said the negative effects of climate change have already started to surface in other ways — including the impacts of mountain pine beetle infestations on the forestry sector and more frequent droughts on the agricultural industry.
Looking over the longer term, he said if rising temperatures were to trigger more frequent negative economic shocks, then the Bank of Canada would have to find ways to account for them as risks in its policy decisions.
He acknowledged, however, that the forces created by global warming can be difficult to capture in economic models.