Climate change and the ramifications for financial markets are being given greater consideration by policymakers. A carbon tax is now openly discussed, as political leaders come under pressure to take the warnings of scientists more seriously.
A carbon tax could be a positive for world economic growth. Carbon emissions are a constraint on growth and economic development: a tax that funds investment and accelerates the development of renewables could help bring down their marginal cost even more quickly.
The indirect benefits, by diverting funds into renewables, could be much more important, given that an inflexion point has already been reached. The cost differential in favour of wind and solar, vis-à-vis fossil fuels, could widen dramatically with a carbon tax.
Climate change will have a disparate impact on equity markets: there will be big losers, and winners. Many of the larger US technology companies have already shifted to renewable energy: they will be less exposed to a carbon tax. At the other extreme, airlines are very vulnerable: the development of electric aircraft is still in its infancy. Investors will not wait for more extreme climate events: they are already scrutinising companies, probing the long term viability of different business models. In one notable case, investors targeted Exxon, and were repelled by the SEC, but the pressure will grow.
The recent floods in Mozambique, Malawi and Zimbabwe underline the risks for government debt. In the early years, climate change may affect a smattering of more vulnerable, geographically-exposed EM countries.
