Consumers and businesses will end up being harder hit in the long term if there is a delay in addressing the costs of climate change including hiking taxes, Central Bank Governor Philip Lane has warned.
It appears that consumers will end up bearing the bulk of the costs whether it be converting houses or trading-in cars. Prof Lane's warning came after Minister of Finance Paschal Donohoe backed off plans for a carbon tax hike in the 2019 budget and French President Emmanuel Macron grapples with violent protests after he introduced environmental taxes that went down poorly in rural France.
"We plan to incorporate the carbon transition into our macroeconomic and financial stability assessments. Over time, the carbon transition will be an influential factor in shaping macroeconomic outcomes," Prof Lane said.
Green issues have been a thorny issue for central bank governors as well as for politicians and Bank of England Governor Mark Carney drew widespread criticism for sketching out an environmental agenda some years ago.
Prof Lane, in a speech at the National University of Ireland in Galway, said that a slow walk on environmental issues would inevitably result in what he termed a "sharper adjustment" that would threaten "macroeconomic and financial stability risks".
"The economy-wide and societal challenges posed by climate change mean that it is inevitable that the financial system has a central role in managing climate risks and financing the carbon transition.
"Accordingly, the strategic plans of financial firms will have to address climate change," Prof Lane said.
"Equally, as the guardian of financial stability and the financial regulators, central banks have a leadership role in ensuring that climate change is a strategic priority for the financial system as a whole," he said, sketching out a role for the Central Bank of Ireland in climate change. Prof Lane cited research from the Bank of England that showed the value of registered weather-related losses that were both insured and uninsured has tripled from around $50bn a year in the 1980s to $150bn over the past decade.
Ireland has already announced plans to restrict the use of diesel-powered cars, but it is one example of how preparations need to be speeded up or risk a financial shock to households as the country eventually transitions to less polluting forms of energy.
If this shift takes the form of a steady annual switch, the depreciation rate of existing stock will gradually increase, without any severe shock to the wealth of households, Prof Lane said.
In contrast, if the switching rate is too slow, a future cliff edge risk will exist, in which households scramble to sell oil-fuelled cars, with a collective loss of value affecting owners and credit providers and it is also possible to envisage an excessively-rapid switching rate that would also generate a valuation shock. Householders would appear to be on the hook for most of the cost of transition, with government set to offer little help, according to his presentation.
Households will have to retrofit homes in order to reduce energy consumption.
"While part of the cost may be met by public subsidies, the bulk of this expenditure will have to be met by individual families," he said.
"Given the multi-year payoff to such household capital expenditures, much of this investment will need to be financed through home renovation loans."
Add into that higher weather related insurance costs and consumers will face potentially large bills.