The overall risk, including climate risk, has been reduced. The Norwegian economy is also exposed to abrupt changes in operating parameters for oil and gas production through spillovers from offshore activities to the wider economy. We have long known that Norway’s offshore petroleum activities would be gradually reduced. If global climate policy proves to be stricter than currently expected, the decline in offshore activity may occur sooner and more rapidly than previously assumed. This will have consequences for Norway’s industry structure. Even though it is likely that the biggest changes in oil-related industries lie some years ahead, climate risk may also have an effect on the oil sector in the short term. There are perhaps signs of this effect in recent years’ oil stock prices. Chart: Valuation of oil stocks The price-to-book (P/B) ratio is lower for international oil companies than the average P/B ratio in the stock market, and this gap has widened in recent years. There may be several reasons for this, but we know that investors’ climate risk awareness has increased in the same period. Measures to influence industry structure are not within Norges Bank’s remit. However, if the decline in the oil-related sector were to occur abruptly, the spillovers to the wider economy could be considerable. Monetary policy is adjusted to changes in output, employment and inflation and can therefore support overall activity and employment in a period of restructuring. The responsibility for the restructuring itself lies elsewhere, not least with the business sector.
In order to work on these issues, central banks and financial supervisory authorities have formed the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Norway is represented by Norges Bank and Finanstilsynet (Financial Supervisory Authority of Norway). The aims of the network include building knowledge and sharing best practices on climate risk management within the financial system. Climate change, the macroeconomy and monetary policy Natural disasters and extreme weather have an adverse impact on the production of goods and services. The agricultural sector is particularly vulnerable. But extreme weather events have also disrupted infrastructure and production chains. In the years ahead, climate change will lead to an increase in the frequency and intensity of weather events that have a negative impact on output. In Norway, monetary policy is the first line of defence against economic shocks. When Norges Bank sets the policy rate, most weight is usually given to the outlook for the Norwegian economy over the next few years. Thus, there could be implications for monetary policy if extreme weather events occur that affect inflation and output prospects within this horizon. Economists refer to events that unexpectedly reduce output as negative supply shocks. Such shocks typically push up the price of the affected goods. There are many examples worldwide of spikes in food prices following extreme weather events or long periods of drought. Electricity prices vary considerably in Norway depending on the amount of precipitation.