Our biggest secular concern for financial markets should now be visible even through the thick, hazy smoke of wildfires burning across Canada, Hawaii and Southern Europe. Climate change appears to be accelerating, despite the best efforts of China and the US (belatedly) to ramp up renewables.
Climate change will egregiously impact on public sector finances (through multiple channels – higher costs from damage and destruction, loss of economic output, collapse of insurance coverage). Higher real bond yields will eventually force a reduction in asset market valuations. QE to fight climate change is not really an option when the policy tool has been mismanaged and misused since its inception in 2009. As we warned in 2009, QE was then a chance to get ahead on the race to limit rising carbon emissions (and to get fiscal balances in order). That window of opportunity has passed.
Real bond yields are currently being pushed up by poor control of government finances. Numerous recent commentaries have underlined the problems within the US, the UK and Japan. Public sector debt has come down in Southern Europe, as a share of GDP. But it remains far too high: these countries are on the front line of global warming. In short, most advanced economies are ill-prepared to deal with the threat posed by climate change.
Optimistically, the pictures of devastation wrought by wildfires may just spark soul searching and pressurise politicians to up their game. And drive home to the general public, that current consumption patterns are unsustainable.
Pessimistically, instead of reflection and change, the opposite may happen. A blame culture ensues. Politicians shamelessly score points on ‘green policies’. The general public defiantly refuses to change behaviour. There is no collective responsibility. Climate change is someone else’s responsibility/fault. The depressing spectacle of the recent UK parliamentary by-election in Uxbridge and the political fallout is a case in point.
