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Risk of climate change triggering a financial crisis

by Bunkerist
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Does climate change trigger a financial crisis caused by the fossil fuel industry?

Fossil fuels are alarming among the factors that threaten climate change. It is doubtful that it reflects the real value of companies that extract, distribute, use and commercially rely on fossil fuels. These institutions and assets may suffer from unexpected and sudden regulations, obligations or restrictions.

As such, it is not an extraordinary assumption to think that climate change can trigger a systemic financial crisis. Banks cooperating with these companies should also question their role in reducing possible risks.

The wait-and-see approach to climate change may cause central banks to face surprises in performing their financial stability tasks. However, central banks can neither assume the roles of governments or private actors nor coordinate between interested organizations. Critical breaking points can lead to catastrophic and irreversible effects that would make it impossible to measure financial losses.

The risk is obvious and more evident every day, it makes itself felt by growing. In order not to experience disappointments, it is necessary to make urgent and ambitious action plans for the structural transformation of economies, which includes major changes in regulations and social norms, as well as technological innovations that can be scaled.

Interactive, nonlinear and essentially unpredictable environmental, social, economic and geopolitical dynamics irreversibly support greenhouse gas formation and release into the atmosphere.

It is also worth noting that when the inevitable risks known by climate change come true, they can trigger risks that are not reflected on past data. In this context, it is important to evaluate the risks related to the future climate from the assumptions of the risks likely to be triggered by analyzing historical data.

It is not easy to predict future energy and technology trends while  investing to ensure the energy transition required to prevent severe climate effects and how the fossil fuel industry will be affected thereafter.

As an example, the sharp increase in usage and cost difference in many renewable energy technologies over the past few years has exceeded most of the estimates. This seems to have responded to major investments in R&D and subsidies to solar energy.

On the one hand, the disruption of renewable energy remains an important issue that is ignored.

In short, the type of technological solution that will prevail in a low carbon world is unpredictable. A striking issue here is the transportation sector. The most promising technological developments are creating new alternative technologies such as hydrogen fuel in a short time.

Banks can coordinate actions

A new global financial crisis triggered by climate change may weakens central banks and financial supervisors.

As a complex collective action issue, climate change requires coordinated actions among many players, including governments, the private sector, civil society and the international community. As part of this framework, central banks can help clarify climate risks.

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