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The hit seen in the central bank's scenario would mean a persistently lower policy interest rate.
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Canada’s GDP may take a 10% hit by 2050 from global actions to avoid devastating climate change according to a report Friday from the banking regulator OSFI and the central bank, a scenario it said would mean “a persistently lower policy rate.”
Most of the domestic setback relative to a baseline scenario of no major new climate action comes from falling prices for commodities, a major source of Canadian exports. The paper modeled nations keeping global temperatures from rising by 2 degrees Celsius and a net-zero policy limiting the rise to 1.5 degrees, and found delayed action is even more costly to the economy.
"In all scenarios, core inflation declines as lower foreign demand and commodity prices more than offset the cost-push effect of the carbon price increase," the Bank of Canada said in a statement. "In reaction to disinflationary pressures, monetary policy adopts a more accommodative stance through a persistently lower policy rate."
In collaboration with six major financial institutions, the research examined 10 emissions-intensive sectors, including agriculture, primary energy, electricity, energy-intensive industries and transportation, accounting for 68% of Canada’s greenhouse emissions.
The report focused on the cost of transitioning to cleaner energy and not physical damage from flooding and intense storms that are already boosting insurance payouts. Officials stressed the paper is a pilot project and not an economic forecast, and data gaps mean the results must be treated cautiously.
The head of OSFI told MNI last month banks may face higher capital requirements to account for climate risk, and Canada has already imposed a carbon tax. Investor perceptions of climate risk are already detectable in the movements of Canada’s currency, as well as those of other major commodity exports, research shows. (see MNI INTERVIEW: Commodity Currencies Hit By Climate Risk).