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Matthew Lau: Memo to the Bank of Canada: Your target is inflation, not carbon

Financial Post logo Financial Post 2022-05-26 Matthew Lau
The Bank of Canada in Ottawa. © Provided by Financial Post The Bank of Canada in Ottawa.
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Canadians afflicted by the Bank of Canada’s inability to deliver on its core responsibility — controlling inflation — will not be encouraged to learn of the central bank’s grand plans to save the world from climate change. So great is climate concern at the Bank of Canada, and so ambitious are its plans, that while its latest annual report , released April 26th, mentions “inflation” 38 times, the word “climate” appears 78 times. Yes, inflation is now out of control, but at least in 2021 — according to governor Tiff Macklem’s foreword to the annual report — the bank improved its understanding of the financial system risks associated with climate change.

The financial system risks of climate change? There are none! If financial institutions were in the habit of filling their balance sheets with 200-year loans, then there might be some systemic climate financial risks, for although the costs of climate change are likely to be modest, risk and uncertainty dominate such a long horizon. But the typical mortgage term in Canada is five years or less. What is the probability that over the next five years man-made climate change will alter the weather so severely that financial institutions’ balance sheets become impaired to the point of putting the entire financial system at risk? Unless the system is already so fragile that even a breeze would bring it smashing down, the probability of systemic risk must be statistically indistinguishable from zero.

In its annual report, the bank nevertheless concludes that climate change “poses important risks to the financial system” and so it “remained an important area of focus … in 2021.” It cites its Financial System Review , done last year, which described both physical risks of climate change (direct financial damages associated with global warming and changing weather) and transition risks (losses from transitioning to a low-carbon economy, government regulation, and changes in consumer and investor attitudes). With the inclusion of transition risks, there is a slightly more plausible threat to the financial system, but the problem is not climate change itself but haphazard government regulation and spending in the name of fighting climate change. Bad government behaviour, not climate change, is the real risk.

We might include in such bad behaviour the Bank of Canada’s contributions to climate alarmism as well as its advocacy for a top-down transformation to a low-carbon economy. Its annual report highlights its “key role in many important discussions” with international leaders about tackling climate change and says its “work on climate transition scenarios illustrates the importance of transition financing for all sectors to achieve a smooth shift to a low-carbon economy.”

What’s of even greater concern is that, according to the Financial System Review, “the financial system plays a critical role in supporting the achievement of global climate targets.” To the extent that, following such guidance, regulators and bankers politicize financial activity and re-orient financial institutions to focus increasingly on the supposedly critical work of fighting climate change at the expense of profit maximization and prudent lending, then there would indeed be some significant risk to the financial system. But again, bad government behaviour, not climate change, would be to blame.

One section of the bank’s annual report describes how it will reduce its own carbon footprint and presents its climate plans for 2022. Its to-do list includes: further assessing climate financial risks; analyzing options to integrate climate change considerations into the design of market operations; steering the international climate policy dialogue; decarbonizing its own operations; and contributing to the work of something called the “Network for Greening the Financial System,” which brings together more than 100 central banks and financial regulatory authorities to help push countries to meet the targets set out in the Paris Agreement and to “enhance the role of the financial system” to “mobilize capital for green and low-carbon investments.” There it is again: the intention is to inject political and climate objectives into financial institutions’ business purposes and activities — something that should worry all Canadians.

Even in the best of times, let alone when inflation is soaring, the Bank of Canada should have a laser focus on its core objective, which is to control inflation, not promote climate alarmism or engage in other collateral pursuits. At bottom, the Bank of Canada’s purpose is to maintain a low-inflation economy. It should have nothing to do with a low-carbon economy.

Matthew Lau is a Toronto writer.


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