Speech Klaas Knot - “The impact of the energy transition on our economies and financial sectors: challenges and opportunities”

Datum: 28 februari 2020
Locatie: High Level Conference of the IMF Constituency
Spreker: Klaas Knot

Welcome to Amsterdam. It is great to see so many familiar faces and to have our IMF Constituency Group together once again. I am glad we have these opportunities to discuss current issues.

On today’s agenda is “The impact of the energy transition on our economies and financial sectors”. You are all aware of the increasing focus on climate risks in recent years. Particularly in light of the commitments governments have made to meet the goals of the 2015 Paris Agreement. It is an issue that is appearing more and more frequently on the radar of central banks and supervisors.

I am sure you are familiar with the work of the NGFS. When the Central Banks and Supervisors Network for Greening the Financial System was set up two years ago it had eight founding members. Since then, membership of the NGFS has grown rapidly. Today, it has 55 members and 12 observers.

We often distinguish between two types of climate-related risks: physical risks and transition risks. Today I will share with you some historical examples of energy transitions we have experienced in the Netherlands. How these have affected the economy and society, and what we can learn from these experiences. Arguably, the most important lesson is that energy transitions not only pose threats, but also opportunities. And while it is important to control these threats, it is also important to seize these opportunities. However, before turning to transitions, let me start by discussing physical risks.

We are seeing severe climate events occur with increasing regularity. You will probably have seen the images of the wildfires in California and Australia on the news. Not to mention the recent flooding in the North of England and Jakarta. As well as damaging the environment and leaving many families homeless, these events are also harmful to the economy.

Here in the Netherlands we have just experienced the warmest January since records began. February is relatively warm as well.
Now some of you may know that we have a famous ice-skating event in the Netherlands called the Elfstedentocht. The Eleven Cities Tour. The tour follows a route along frozen canals, rivers and lakes across eleven towns in the north of the Netherlands.

The tour is almost 200 kilometres in length. But it is only held if the ice is, and remains, at least 15 centimetres thick along the entire course. Any hint of sub-zero temperatures sparks excitement in the hearts of millions of Dutch people. But the last Elfstedentocht was held way back in 1997. Sadly, it seems unlikely that it will happen soon again. Last year we watched Olympic gold medal winner Maarten van der Weijden on television showing us that it is in fact possible to swim the Elfstedentocht in three days. Perhaps this is the new reality we need to adapt to?

But in the Netherlands, adaptation is in our DNA. Our national character has been shaped by our constant struggle against water. A large part of the Netherlands is below sea level. Which is why managing this water is vital. To reclaim land from the sea, and protect the Netherlands from flooding, we need everyone to cooperate. And nothing unites people like a common cause. In Dutch, we call land regained from the sea ‘a polder’. We’ve also turned this noun into a verb. As a verb, polderen means to cooperate and reach consensus.

Almost half of the Dutch population live below sea level. At its lowest point, near Gouda, the Netherlands is actually seven meters below sea level. Without proper dykes and water management systems, the ground floor of this building would be regularly flooded. But don’t worry, you are now sitting far enough above sea level, so even if the dykes do fail we will still keep our feet dry.

At first it was a battle to defend our country from the water. But over the centuries we have learned how to live more in harmony with water. Nowadays we realize more and more that we need to live together with water. Not to fight it. This is how the Netherlands has built its water management expertise to deal with water coming from both the seas and water coming from the rivers. We have turned a threat into an opportunity. Now we are world leaders in this field. Dealing


with rising water levels has become a business in the Netherlands. Delegations from Jakarta to New Orleans visit the Netherlands to seek our expertise. Dutch firms dominate the global market in high-tech engineering and water management.

Rising water levels are just one of the physical risks we face. But we must also consider transition risks. The upcoming energy transition will require unprecedented changes to our economies and financial systems.
Although we face a challenging future, we can learn a lot from the past. Because energy transitions are nothing new. In the Netherlands we have undergone several major energy transitions throughout our history.

In the seventeenth century we switched from wood to peat as our main source of energy. Then in the nineteenth century we changed from peat to coal. The rise of the oil industry in the twentieth century led to another energy transition.
A major turning point in Dutch energy use occurred sixty years ago. In May 1959 to be precise. An enormous natural gas field was discovered in the north of the Netherlands. This natural gas field offered a very cheap source of energy.

In the 1960s the Netherlands transformed a large fraction of its energy use from coal to natural gas. During this transition the Dutch government announced the closure of the coal mines in 1965. This implied that 75,000 jobs connected with coal mining would be lost by 1975. To give you an idea, this directly affected the job of one in four people in the affected southern region of our country.

Even though the energy transition came at a cost, there were also important benefits. To start with, new jobs were created in the natural gas and related industries. Natural gas is a cleaner source of energy, so air quality, especially in the cities, improved. Furthermore, the revenues it generated helped the government finance large infrastructure projects, such as the so called delta works which protect the country from the sea. These delta works have been declared one of the Seven Wonders of the Modern World by the American Society of Civil Engineers.

So what did we learn from these previous transitions? Energy transitions usually trigger a large reallocation of labour. They also very likely require large scale government intervention and financial support. Effects are long-lasting and have important social consequences for those affected. However, transitions also provide opportunities and it is important to realize these as well.

One example is the company DSM. DSM started life as a coal mining company Dutch State Mines. After the mines closed it changed its focus to petrochemicals. Then it evolved further, specializing more in plastics and fine chemicals. It currently focuses on life sciences and biotech. It is a financially healthy company and with over 20,000 employees globally.

Countries can have similar experiences to the Netherlands. For example, the decline of the coal industry in Belgium and the UK also had major regional economic consequences. Different countries have dealt with energy transitions in different ways.
In fact, the challenges in our IMF constituency are fairly heterogeneous. For example, among our members we have countries that are completely coal-free. While in other countries , over half their power comes from coal. That means the tasks and opportunities we face in transforming the economy will be quite different.

There are also differences between the 1960s and current developments. To name a few, instead of a cheaper energy source replacing a more expensive one, the current transition is different because relatively cheap fossil fuels will not be used anymore. Also, the present energy transition not only affects the real economy, but to a greater extent the financial sector, which is currently much larger than in the 1960s. Furthermore, the affected energy providers are nowadays much more often privately-owned.


In terms of financial impacts we are on new ground. Banks, insurance companies and pension funds each face different challenges. We still need to develop more and better tools to assess how these financial institutions will be affected by the transition. But we are working on this, both within DNB and in international fora, such as the NGFS. For example, we published reports about the financial risks related to floods and how the Dutch economy would be affected by a carbon tax. A further challenge for us as central banks is that we do not only need to consider individual financial institutions’ vulnerabilities, but also the vulnerability of the financial system as a whole. The issue of stranded assets is a key risk in this respect, in particular if it is coupled with fire sales.

To assess potential financial stability risks arising from a disruptive energy transition, De Nederlandsche Bank has developed a transition risk stress test. With this stress test we were able to generate a first assessment of potential financial stability risks. Paul Hilbers will tell you more about the ins and outs of this stress test this afternoon.

Before I finish I would like to thank the speakers who accepted our invitation to discuss the energy transition. We look forward to listening to your insights. As I mentioned, different countries have dealt with energy transitions in different ways. So this is a topic where we can benefit from sharing experiences, past and present. Today we also have the opportunity to learn from experts in and outside the central banking community. This is vital, as the energy transition will affect all sectors of the economy

We, as central bankers and international financial institutions, as well as the private sector, still need to learn a lot about how transition risks can affect the economy and financial institutions. I trust our discussions today will help us gain a more complete picture of the challenges we face. Both in terms of controlling the threats, and seizing the opportunities. Please discuss this issue freely, and of course enjoy your stay in Amsterdam