By Paul Vieira
OTTAWA--Financial institutions in Canada are in the early stages of developing robust risk-management systems to deal with climate change, which could have a material impact on the country's growth and inflation profile due to the economy's reliance on commodity exports, central bank and regulatory authorities said Friday.
Once risk-management plans are in place, Canada's bank regulator will decide on whether banks need to set aside additional capital to deal with climate-related financial risks, officials told reporters.
The Bank of Canada and the Office of the Superintendent of Financial Institutions issued an analysis of the country's financial system's exposure, which was meant to identify structural and data gaps. A number of Canada's top financial institutions participated in the exercise. The analysis developed economic outcomes based on certain scenarios, such as how quickly governments implement policy measures to reach certain goals like net-zero emissions by 2050, and the Bank of Canada said these should not be interpreted as economic predictions.
The shift to a low-carbon economy means "some sectors will be significantly impacted, and the economy as a whole will undergo significant structural changes," said Toni Gravelle, deputy governor at the Bank of Canada. "This transition will prove more challenging for commodity exporting countries just like Canada."
In the scenarios examined, efforts to combat climate change generally lead to weaker demand for goods and services, and a decline in commodity prices--thereby lowering Canada's terms of trade, given that crude oil is a top export. Furthermore, core inflation would decline as lower foreign demand and commodity prices more than offset a rise in carbon levies. In response, monetary policy would likely become accommodative.
Canada's Liberal government has pledged to reduce carbon emissions by at least 40% below 2005 levels by 2030, and net zero by 2050. Measures to meet those goals will include a cap on carbon output from oil-and-gas producers--something, he adds, no other major oil-producing economy is proposing. More details are expected later this year.
In accompanying documents, officials said the financial effects from a transition to a lower carbon-emitting economy could lead to a reassessment of financial assets and an ability to repay debt, and an alteration of projected earnings and expenses.
"We will be focused on promoting sound risk management of regulated entities," said Ben Gully, a senior official at OSFI. "The question of whether financial institutions should hold extra capital to cover the financial risks stemming from climate transition will depend on the effectiveness of risk management."
Mr. Gully said bigger capital buffers "is no substitute for risk management. And we need to have risk management in place."
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