Few issues currently generate such passionate supporters and fierce detractors as climate change. It is as interesting to read the numerous scientific arguments attempting to demonstrate the devastating impact human action can have on climate change as it is to observe the skepticism of those who consider climate change an inexorable fact about which nothing can be done, as it is part of an interglacial period.
Similarly, it is interesting to read the disdain of other authors who, without being scientists or having dedicated themselves to the study of climate change and its consequences, question the arguments of those of us who believe that, whatever the explanation, it is worth being sensitive to this phenomenon and assessing both the negative consequences and the opportunities derived from it.
Economists, usually removed from the scientific arguments supporting one position or another, should not enter such a technical and complex debate were it not for the fact that, if we apply a principle of prudence and therefore consider the significant influence of human action on climate change as possible, normative questions, incentives, risks, costs, and opportunities immediately emerge that must be shaped so that the outcome for society is fair and balanced.
Posing the dilemma of choosing one side or the other in this debate implies accepting what type of indicators may suggest the existence of anthropogenic global warming (accelerated by human action). To do this, it is relatively easy to choose certain authors over others, question whether the rise in temperature is real and significant or if meteorological effects are now more serious, frequent, and intense than in the past, and end up paralyzed in a sterile debate leading to inaction. However, it seems more prudent and interesting to join the current of those who value that the cost of paralysis can be much higher than the opportunity cost. It is true that seizing the opportunity to transform a society to align it with the natural environment in which it coexists, as a response to human action against climate change, may have a high cost; yet, it remains more satisfying than remaining in criticism or inaction.
There should not be the slightest doubt that living in an emissions-free environment, or one with lower levels of pollution in cities, eliminating the use of plastics, or modifying consumption habits to promote responsible behavior, cannot in any case be harmful; instead, after an appropriate transition period, it should foster a healthier and more sustainable environment that results in a greater degree of social well-being.
The obsession of public policies, in this sense, far from being carried away by a trend or fashion, carries the enormous responsibility of designing incentives to promote this social and productive transformation, as well as covering the implicit costs derived from this process during the transition period.
One could speculate on the utility of this effort, especially considering that other countries remain far from this commitment to change, but it is of no use to stop in inaction just because others have not found the time to act—especially in a country like Spain where 97% of its citizens, according to the survey conducted by the Elcano Institute, are sensitive to this problem and agree that appropriate measures should be taken to mitigate the human effect on climate change.
Risk management is an innate human attitude. At this moment, as Mark Carney, Governor of the Bank of England, has repeatedly pointed out, climate change represents one of the main risks facing the financial system. This risk unfolds into two perspectives. On one hand, the physical risks derived from global warming, whether caused by human influence or not. On the other hand, the so-called transition risks that may involve the disappearance of sectors and companies due to a combination of factors, such as very demanding regulation, an inadequate distribution of costs, the emergence of innovative technologies, or a change in household consumption patterns.
Indeed, the financial system is the paradigm of this set of risks because, if the forecasts set out in different scenarios by the Intergovernmental Panel on Climate Change (IPCC) materialize, it could face a change in its business model, as well as a reduction in the value of its assets in the medium or long term, jeopardizing the stability of the financial system. Hence, financial supervisors try to be cautious by designing regulation that ensures the effects derived from climate change and the transition process do not jeopardize the solvency of the banking system as a whole. Consequently, this debate is not an option for banking, and that is why the sector in Spain has adopted various initiatives; the most recent and significant has been the sectoral agreement signed during the Climate Summit -COP25- in Madrid, through which Spanish banks have committed to aligning themselves with the Paris Agreements by 2030.
Regarding opportunities, whether or not the indicators supporting the convenience of decarbonizing the economy and modifying consumption patterns are certain, there is sufficient certainty about how the preferences of consumers and investors are changing. The best example, though not the only one, is offered by the world of asset management. For years, investors have demanded that their money be invested with profitability criteria conditioned on the execution of sustainable projects, either because they reduce greenhouse gas emissions, or because they increase energy efficiency or promote a fairer and more balanced society. It is not a matter of placing one criterion above another, but rather that investors are beginning to demand that the traditional risk-return binomial be enriched with a new vertex: impact and sustainability. This approach opens a huge opportunity in terms of both financing and demand, as it opens new market niches for all companies that resolutely commit to the decarbonization of the economy.
But there are many other examples, and the Spanish housing stock, with low levels of energy efficiency and adequate accessibility, is another one of them. It is a market that must undergo a profound transformation, and there are plenty of reasons for it, whether because it is necessary to mitigate the effects of climate change or because it is necessary to adapt to the needs of an increasingly aging population.
In short, the debate should not focus on which scientific current is the most appropriate and disregard those who disagree with it, but on the design of a more socially and environmentally balanced society. Climate change, the decarbonization of the economy, or energy efficiency are sufficiently valuable arguments to consider the opportunities derived from this change. Likewise, proper management of the risk implicit in this transformation will result in greater solvency for the financial system. Distorting this debate, on the contrary, can only lead to imprudence and inaction.
Juan Carlos Delrieu, Director of Strategy and Sustainability
