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It is a pleasure to be here at today’s conference organised together with the International Energy Agency (IEA) and the European Investment Bank (EIB), the first time our institutions have joined forces like this.
The recent years have shown that volatile energy prices and persistent shifts in energy markets can have significant implications for inflation dynamics.
Despite our different mandates, we therefore have a shared interest in an orderly energy transition.
In the last few years, two points about this transition have become increasingly clear.
The first is that the scientific consensus on climate change is being borne out.
Everywhere we look, we see natural disasters becoming more frequent and more severe, with the floods in Greece and Libya being the latest examples. Over the past fifty years, the number of weather-related disasters has increased by a factor of five.[1]
The second point is that there will be high social costs if we get the green transition wrong.
Last year’s energy crisis was unrelated to the green transition, but it highlighted how vulnerable we are to energy price volatility. And that drew attention to the potential burden decarbonisation might put both on industry and people, increasing support for those who favour delaying climate action.
So how can we meet the urgency of the challenge – but also be less disruptive?
To my mind, there are three key elements of a smooth transition: avoiding procrastination, understanding the challenge, and sharing the burden fairly.
First, while it is tempting to think that we can smooth out the cost of the transition by pushing back climate targets, the evidence suggests that this will not be the case.
Procrastinating is likely to increase the bill we will end up having to pay. In our recently published economy-wide climate stress test, we showed that under a late-push transition, the most vulnerable banks would face loan portfolio losses twice as high as the median.[2]
And pushing back targets will not buy us more time for the investment required. The latest ECB survey on the access to finance of enterprises for the first time included a question on what encourages or hinders green investment. The answers, published this week, are clear – according to firms, stricter climate standards provide a stronger incentive to invest than the physical impact of climate change.[3]
In other words, procrastinating will mean we run the risk of ending up in a halfway house where we are phasing out polluting energy sources before we can replace them with clean ones – a recipe for more price volatility and political backlash...
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