Roundtable: Green Bank in Portugal – challenges and the real impact on the national economy

I would like to start by thanking the organisation for the kind invitation to participate in this Conference.

Addressing a topic that is probably one of the few capable of challenging the position of the pandemic in terms of relevance is an invitation which cannot be refused.

I would also like to salute my fellow participants in this roundtable.

It is truly a great pleasure to be here. Not just because being and talking among people, instead of being behind the screen, brings back a sense of normality. But also because I very much welcome this opportunity to address the critical issues of sustainable finance and climate change -- as seen from the lenses of the Central Bank.

I trust we will be able to provide some interesting insights into the risks and opportunities we all face in this common goal of moving forward towards a more sustainable future.

In order to stay in sync with the rules of effective and efficient communication, I will try to emphasise four key messages, in a very synthetic way, in this initial address.

These four key messages cover:

• Acknowledgement;
• Green recovery;
• Roles; and
• Mechanisms.

Depending on how our debate evolves, I hope to be able either to cover additional topics or to go a little deeper on those already covered. Particularly in what relates to how the financial system and Banco de Portugal can provide a contribution on this common challenge of sustainability.

To start with, my first point is to clearly state that Banco de Portugal, in its role as Central Bank of the Portuguese Republic, acknowledges the national and global relevance of sustainability issues.

This means that Environmental, Social and Governance issues must be regarded as relevant for both the world economy and the Portuguese economy.

We also recognise that climate change is a global risk that calls for global cooperation and solutions. 

And we believe that urgent, coordinated and determined action, on a global scale, is key to cope with the economic and social impacts which are laying ahead of us.

We also know that these impacts – apart from potentially taking the form of “cliff effects” rather than materialising in a linear way – are deemed to be broad, deep and largely irreversible.

My second point is related to the so called “green recovery”.

Before saying anything else, and for the sake of clarity, let me just add that, as a Central Bank, we do not dispute the scientific claim that we need to move towards a carbon neutral, or even negative, economic model.

Having this in mind, what I would like to emphasise in this second point is that if Science is right about the importance of moving towards a carbon neutral or even carbon negative economic model, then the critical importance of climate change and other long-term sustainability issues cannot be pushed aside by the urgency of the pandemic crisis.

There is a growing consensus being formed around the notion that Covid-19 has had a huge short term symmetric impact, but it will ultimately lead to asymmetric outcomes, as the crisis follows its course.

And the consensus is also growing around the group of those that underscore the synergies between the need to crawl back from the current crisis and the need to advance towards carbon neutrality.

The notion of a green recovery has been, by now, repeatedly stressed -- and that notion has a lot of fertile ground to be encouraged and deepened.

This takes me to my third point, which has to do with the Roles that each agent needs to perform on the path towards a greener and more sustainable future.

And I start by stating something that has become increasingly obvious: if we are to succeed in the collective endeavour to mitigate and adapt to climate change, then the entire society must contribute. Corporations, consumers, NGOs, the scientific community – they all have a role to play. 

And since “all” … means all – that is also certainly the case of the financial sector and central banks.

But we cannot forget that the root cause of climate change is what can probably be considered as the largest mispricing phenomenon that mankind has ever witnessed.

And if we believe that we’re dealing with an economic problem known as a negative externality, then we have to conclude that climate change must be tackled, first and foremost, by political authorities. They are the ones with the legitimacy and control over the most effective instruments to deal with the root of the problem.

Coming to my fourth and last point, it addresses the mechanisms which are more likely to produce the desired outcome, in terms of economic agents’ behaviour. And the view we have is that climate policy is more efficient if it builds on market mechanisms. 

Naturally, this statement comes with a caveat: such mechanisms must be allowed to operate in an open and competitive way. Which in turn requires preserving a level playing field.

If we look at recent developments regarding the European Union’s emissions trading system, they can be seen as a good example.

The price of carbon allowances in the ETS market has been hitting consecutive records since late 2020. It rose above 56 euro per tonne last week, which compares with 23 euro per tonne at the beginning of the rally, and less than 8 euro per tonne in early 2018.

This trend follows the announcement, by European Union leaders, that they will now aim for a 55% reduction in GHG emissions by 2030, compared to 1990. The previous target was 40%, and this increased ambition seems to have been perceived has an indication that carbon permits will become scarcer – and therefore more valuable.

Price effectively paid is one of the most powerful, if not the most powerful, influencers of economic agents’ behaviour. Choosing mechanisms that allow the true cost of products and activities to be reflected in their price, which includes their respective negative externalities, is clearly, whenever possible, the best option to consider.

There is, of course, much more to be said about this, but I will stop here, in order not to exceed the time that was allocated to these initial remarks.