General principles that should inform economic policy in the face of climate change The optimal economic policy strategy to guide the transition to a more sustainable economy requires striking a balance between, on one hand, encouraging decisive action before it is too late and, on the other, mitigating the social costs associated with the transition process. And this requires an appropriate sequence of measures to be adopted. “Early” intervention would mitigate Mark Carney’s “tragedy of the horizon”.1 But, there is no way of hiding that this strategy also comes at a cost, since the economy would have to go through the process of becoming more sustainable with current technology. This would make it impossible to exploit all the potential cost savings and effectiveness improvements of future innovations that are currently not available, but would be if the timing of measures was more orderly and less hasty. With regard to this balance between speed of action and the costs associated with the transition process, the European Union as a whole appears to have decided to take the lead on early action.2 In the case of Spain, some sociological studies3 suggest that most of society is aware of the risks of failing to act and seems to be prepared to accept some of the possible costs that may arise from starting to intervene now. That said, this is a collective decision that can only be legitimately taken by our political representatives.
I am acutely aware of the fact that the HKMA is only one of eleven central banks and monetary authorities in the EMEAP group and that the ABF project is an EMEAP project, and not an HKMA project. As I said earlier, I cannot speak for EMEAP, although ABF1 and ABF2 were developed while the HKMA had the honour of chairing the relevant Working Group. Indeed, we are scheduled to hand over chairmanship in May next year, having exceptionally provided the chair for two consecutive two-year terms. But allow me to tell you, nevertheless, what we in the HKMA think could be possible directions to be explored. 20. There are two such directions, which hopefully could lead to an ABF3. First is to enlarge the scope of credit acceptable to the central banks as investors, but address the problem of inadequate credit quality through credit enhancement or guarantee arrangements. Second is the securitisation of bank assets. Both are familiar concepts to the financial markets, and so there is no need for me to elaborate, other than to say perhaps that we favour simple products that can be readily understood not just by simple-minded central bankers but also by the not-so-sophisticated investors in the region. We  BIS Review 79/2005  3  support the EMEAP and other regional fora to further look into these ideas. And we look to the private sector to participate fully in this continuing effort. 21.