The Riksbanks Climate Report 2021

Why does the Riksbank work with climate-related risks?

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Why does the Riksbank work with climate-related risks?

Climate change – the major challenge of our time

Published: 4 May 2022

Climate change affects everyone

Climate change and strategies for dealing with it form one of the most important social issues of our time. The latest report by the UN climate panel, the International Panel on Climate Change (IPCC), states: “It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred”.[1] See page 4 in ”Climate Change 2021: The Physical Science Basis. Summary for Policymakers”, IPCC. It has thus been established that human activities are causing climate change. To prevent climate change from continuing, changes are therefore needed in the way our societies and economies operate.

Climate change originates in greenhouse gas emissions. These have increased in such a way that the Earth's temperature is slowly rising. This, in turn, entails costs when we have more cases of severe drought and flooding, sea levels rise and ecosystems are destroyed. In economic terms, it is common to talk about the effects of the emissions as a negative externality, meaning that when individuals and companies emit for example, carbon dioxide (CO₂), they do not take into account the costs that emissions cause others. This can also be described as a market failure, as it is too cheap to emit greenhouse gases from society’s point of view. Another important dimension regarding greenhouse gas emissions is that it does not matter where emissions occur. They spread rapidly throughout the atmosphere and contribute to global warming regardless of their origin. In turn, this means that we need to take action to combat climate change at a global level.

Action needs to be taken in many policy areas

There is a broad consensus that the most important single thing we can do to tackle greenhouse gas emissions is to make them more expensive, so that those who cause the emissions bear the full economic costs. One way of achieving this is through various kinds of taxes, primarily on CO₂. Another way is through overall quantitative limits, where allocation to companies takes place through the purchase of emission rights. The primary responsibility for taking policy measures against greenhouse gas emissions lies with governments and elected parliaments because they control taxes and regulations that can have major distribution policy effects.

Climate change, and the measures needed to counter it, may have far-reaching effects on our economies. The transition to a less fossil-based economy entails structural changes in different parts of the economy. If politicians decide to increase taxes on CO₂ emissions or the prices of emission rights, this would lead to the phasing out of CO₂-intensive sectors in favour of more environmentally friendly sectors. However, it may also affect companies in the same sectors differently, depending on how well their operations are adapted to the climate transition. The transition to a less fossil-based economy may therefore have both short-term and long-term effects on prices and output. The extent of these effects is very difficult to predict, but they are likely to increase the longer the transition takes.