The Reserve Bank’s French Connection

The long march of climate change alarmists through the institutions reached the Reserve Bank of Australia this month. Prodded or pushed by financial folk here and abroad, it is attempting a new mission impossible: integrating the prognostications of the biggest boondoggle in history into its economic models.

Concerned Francophile central bankers — and climate scientists, naturally — are assisting the Bank deal with troubling “data gaps” and “non-linearities”; and presumably providing advice on how to pull a Green rabbit – the hubris that governments can manipulate Gaia’s climate and weather – out of a Paris 2015 magician’s hat without stampeding the bourses.

It’s an ambitious exercise. As for the outcome, whenever big uncertainty flirts with big data (or a lack of it), big bucks and big government in the climate space, expect more nasty and nebulous scenarios packaged as “predictions”. Ideal for duping voters in an election year and juveniles demanding a cooler planet, but hardly a source of sensible public policy.

Guy Debelle, the RBA Deputy Governor, spoke on climate change and the economy on March 12, 2019. Hosted by the CPD, the public forum was held at the office of the organisation’s legal advisor, MinterEllison, in Sydney’s Governor Macquarie Tower.

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It was the first time a senior Bank official had spoken on the subject.  But what does climate change have to do with the RBA? Surely its statutory duty is to worry about currency stability, employment rates, economic prosperity, the price of eggs, coal, iron ore, etc., while maintaining an efficient payments system and so on? 

The Reserve Bank Act 1959, however, enables the Board to consider virtually anything it deems relevant to performing its duty. Under Section 10 (1) it has the power to “determine the policy of the Bank in relation to any matter, other than its payments system policy, and to take such action as is necessary to ensure that effect is given by the Bank to the policy so determined.”

In this case, the Bank has embraced the UN Intergovernmental Panel on Climate Change (IPCC) reports as holy writ. It accepts that (i) human activity has produced one degree of warming from “pre-industrial levels”; and (ii) there will be at least another half degree of warming everywhere in the next 10 to 30 years.

Why such a small increase would be apocalyptic (even if it occurs) was too heretical a question for this forum. The audience was more interested in the surge in “renewable” consultancy business expected when, not if, the policy-induced “transition” to a low-carbon (dioxide) economy surges on a change of government.

It would be good for some players, Dr Debelle suggested, such as the renewable energy sector. The winners, however, would be unlikely to compensate the losers “in a way that leaves no-one worse off”, especially coal miners and exporters. As for the bogeyman of the age, climate change posed an “unusual quandary” for central bankers. Monetary policy usually dealt with cyclical phenomena or single events, “but climate change meant there would be a permanent shift”, although presumably it would keep on changing. Drawn from the audio version, excerpts from Dr Debelle’s address are in italics below, starting with this one:

The recent IPCC report, SR15 documents that climate change is a trend rather than cyclical, which makes the assessment much more complicated. What if droughts are more frequent, or cyclones happen more often? The supply shock is no longer temporary but close to permanent. That situation is more challenging to assess and respond to.

We need to reassess the frequency of climate events. In addition, we need to reassess our assumptions about the severity and longevity of the climatic events.

Monetary policy was continually assessing the forces impacting the economy. Few of them, however, had the “scale, persistence and systemic risk of climate change.”

 “The challenge is to make sound decisions in the face of uncertainty about how the [climate change] risks will play out.”

One of the main uncertainties was “around the absence of data”. Another was whether the RBA could “map the climate models that are out there … into our macroeconomic models, which are not necessarily set up to handle them.”

We are talking with climate climate modellers. One thing that is useful about economic modellers talking to climate modellers is that we have a common understanding about looking at things in general equilibrium and the challenges of modelling non-linearities. So at least we have some sort of commonality in our language. It is important, however, not to understate that the challenge of embarking down this path is only in its infancy.” 

At this point the title of a 1568 painting by Pieter Brueghel the Elder (reproduced above)  came to mind, and these lines from a William Carlos Williams poem:

 … one
follows the other, stick in
hand, triumphant to disaster

As for non-linearity, the IPCC had something to say about it a few years ago, before the rise of junk science and so-called in silico experimentation.

In climate research and modelling, we should recognize that we are dealing with a coupled non-linear chaotic system, and therefore that long-term prediction of future climate states is not possible. — IPCC 3rd Assessment Report; Section 14.2.2.2, p. 774, 2001.

Anyway, RBA’s macroeconomic models apparently have problems of their own, as it hinted last year when inflation failed to appear on schedule. Some, like Christopher Joye, a portfolio manager at Coolabah Capital Investments, blame it for the housing bubble.

The Reserve Bank of Australia blew the mother of all housing bubbles with the equivalent of 13 cuts to its cash rate – from 4.75 per cent in 2011 to an all-time low of 1.50 per cent in 2016….That was after repeatedly assuring us since 2012 that its ultra-cheap money policies would not fuel super-strong house price or credit growth.

The Q&A session after Dr Debelle’s address was interesting too. He said CPD “pushed us in this direction”, as well as public concern about “extreme events”.

Unfortunately it’s not the way you’d like this to come about. If we’d had extreme events in the other direction [such as cooler than average weather], the outcome would have been problematic as well.

The RBA’s decision to speak on such a politically charged subject so close to an election has attracted criticism in former deputy-secretary of Treasury Des Moore‘s newsletter.

Statements by government bodies which can influence attitudes, add to the controversy and possibly favour one party, should not be made at this time. This generally accepted rule applies to the Reserve Bank notwithstanding its claim to be “independent” and the more so as Debelle claims climate change influences monetary policy.— Des Moore, commentator, March 15, 2019

Moore also expressed concern about “potentially improper political influences”, as the event was hosted by CPD: “It has several Fellows with stated climate change ‘expertise’ and its publications on that subject adopt the dangerous warming thesis,” Moore observed. Other influences, mentioned by Dr Debelle, include former RBA board member Warwick McKibbin and Bank of England Governor Mark Carney, especially the latter’s controversial speech of September 29, 2015, calling for much more than “static” disclosure of disruptive climate-related risks.

As for the RBA’s French connection, the Bank joined the Network for Greening the Financial System (NGFS) last year “to learn and benefit as much as possible from the expertise of others, to understand and contribute to the discussion around the serious challenge of climate change.”

Eight central banks and supervisors established NGFS at the Paris One Planet Summit in December 2017, presumably with the Banque de France playing a lead role. It has grown to thirty members and five observers, representing five continents.

NGFS’s mission could have been written by the UN:

to strengthen the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.

Debelle’s “expertise of others”, malheureusement, seems restricted to signatories of the Paris Summit 2015 and supporters of the UN’s relentless global climate scare campaign.

The RBA’s French Connection comes with obligations too. “…adhering to the NGFS reflects a political commitment from an institution and also implies the will and capacity to actively contribute to the work.” In other words, kiss goodbye to independent judgment and shun perspectives outside the alarmist paradigm.

The first NGFS plenary meeting was held in Bali on October 11, 2018. (Attendees pictured below). Nice work if you can get it. It coincided with publication of NGFS’s first Progress Report. The authors of this “stock-take exercise of national, regional and international initiatives” certainly deserved an exotic holiday.

After the euphoria of Paris 2015, the Report’s preliminary findings were a shock. Authorities and financial institutions need to develop new analytical and supervisory approaches, including those based on — think-of-a-number — “forward-looking scenario analysis and stress tests”.

NGFS’s dilemma: while action (allegedly) is required now to reduce future financial risk, the “historical data is not sufficient to estimate this impact.” It was flying blind. Conceiving “stories based on future potential scenarios” under the palms sounds fun after a few beers, at least until the morning after.

The nature of the risk factors requires an enhanced approach, one that is forward looking and takes a long-term perspective. There may also be benefit of using data driven stories based on future potential scenarios as well as traditional analytics and quantitative risk modelling.

Has there ever been a more desperate appeal to the so-called “precautionary principle” – and weaker rationale for immediate action – than this one?

Exact pathways may be uncertain but it is foreseeable that financial risks will crystallize in some form through either the physical or transition channel, or some combination of them both. And while the financial risks may be realized in full over extended time horizon, the risks call for action in the short-term to reduce impact in the long-term.

Not only are the “tools and methodologies still at an early stage”, there are also big challenges, including translating modeller gobbledygook into “decision-useful” information.

The quality and availability of data is limited, taxonomies and definitions are still developing and there is a need to build intellectual capacity in translating the science into decision-useful financial risk assessment information.

More work is needed “to assess whether a financial risk differential exists between “green” (low-carbon) and “brown” (carbon and pollution-intensive) assets”, as stated in NGFS’s Progress Report of  October, 2019.

When faced with a mission impossible – forecasting the future without reliable datasets or precise predictions – there is only one way forward: construct a storyline, however speculative, and call it “scenario analysis”.

Ironically, after all the bureaucratic posturing, virtue-signalling, head-scratching and soul-searching, the pointy end of the climate-game seems about to end up bogged in a backwater, bereft of meaningful input. Perhaps this explains the current obsession with process, with passing the “hot potato” from the UN bureaucracy to national regulators as soon as possible; ensuring it becomes the legal responsibility of company boards.

Sort it out now, folks, because we are about to make climate-change risk reporting – however nebulous – mandatory — another lucrative source of revenue for the monetizing-the-climate brigade.

In a speech in London on February 22 this year, Geoff Summerhayes, chair of the Sustainable Insurance Forum and an APRA board member, argued that corporate disclosure had a vital role to play in resolving the “climate data deficit”.

Although the scientific link between rising carbon emissions and warming temperatures is irrefutable, data around the likely impact of the physical, transitional and liability risks of climate change, and how to best manage them, remains under-developed. My key message today is that this climate data deficit must urgently change if boards, governments and regulators are to adapt smoothly and effectively to the changing environment.

Spare a thought for company directors now being forced to quantify the unquantifiable – “exposure to the risks of global warming” — under threat of legal action.

What these companies no doubt understand is that the very act of committing to disclose inevitably prompts companies to take practical steps to enhance their business preparedness for the climate-related risks on the horizon. In order for a company to effectively disclose its exposure to the risks of global warming, and its potential opportunities, it needs to know what these are.

Coincidentally, Travers McLeod, CEO of CPD, has been banging the same drum for a while too. In a November 2016 post he argued that a new legal opinion  had found “company directors who don’t properly consider climate related risks could be liable for breaching their duty of due care and diligence.”

The disclosure statement said CPD was funded by unidentified “philanthropic foundations and donations from community and business organisations”.  Furthermore:

CPD partnered with the Future Business Council (FBC) to commission the legal opinion on directors’ duties and climate risks from Noel Hutley SC and Sebastian Hartford-Davis, instructed by Sarah Barker and Maged Girgis of Minter Ellison Lawyers. CPD and FBC also jointly convened the business roundtable to discuss the legal opinion hosted by Minter Ellison Lawyers on 21 October.

In Mr Hutley’s view, “it is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company.” A legal tail is now wagging the climate-change dog, perhaps because it is becoming weary and flea-bitten. So expect more learned argument around “foreseeability”, sustainability and so on.

Courts have long experience of finding fault for inadequate responses to foreseeable risks, even where there is supposed uncertainty. Examples of this are when health risks associated with HIV and asbestos were improperly understood or managed. A defendant can be liable even though they are ignorant, if a reasonable person would have known about them.

But would a “reasonable person” press the “snooze button”, merely accept an argumentum ad populum and join the Carbon Cargo Cult without proper due diligence?

McLeod insists, however, “legally, any excuse that prior uncertainty about the science or impacts of climate change may have previously afforded directors has expired … There is only upside for business leaders to change course.”

In his closing remarks, MinterEllison’s Stuart Johnson claimed “climate change” had become worse and the public wants to see something done about it. There was still a long way to go, however, “as they have had the pants scared off them about what might be involved in addressing climate change at the political level.”

There are two types of scaremongering in the Carbon Swamp. The first is the Climate Scare. It is perfectly alright to frighten the pants — or pantaloons — off voters about the coming climate apocalypse, as countless other prophets of doom have been doing ever since it became widely known that it is such a sweet little earner.

It is perfectly disgraceful, however, to remind them about the energy scare; namely the ultimate cost — to them, the nation and developing world — of more government-subsidized renewable energy projects, the economic consequences of ceasing to mine coal, Australia’s second-largest export, and so on.

Tell that to the juvenile climate strikers and their activist minders, before they are washed away by the rising tide of climate drivel. As for powering the country with 100 per cent RE by 2030 and stopping Queensland’s Adani mine and new coal or gas projects – that gets you to a Venezuela, not to an energy utopia or Goldilocks climate just right for everyone everywhere.

There is a greater risk than climate change: the risk that the NGFS folk, and others, carry on imagining the “scenarios” that will affect the future, recommend “solutions” and continue to be taken seriously by those who should know better.

Quelle horreur.