Everyone now knows borrowing too much is a bad thing for any household or economy. If borrowing rises faster than income, eventually the bubble of debt will burst.

That is exactly what happened in the US economy and the global financial system in 2008 and 2009. American households consumed more than they earned for decades, using debt to bridge the gap.

Eventually, they could not service the debt, triggering defaults that almost destroyed the global banking system in a cascading, ricocheting series of defaults, credit market freezes and bank collapses.

US Treasury Secretary Henry Paulson was the guy driving the ambulance at the bottom of the financial cliff in 2008 so he knows how imbalances build up in a system and how catastrophe can be unleashed by apparently small events.


Now he has gone against his own Republican Party's orthodoxy and called for concerted action to reduce carbon emissions and try to prevent a climate change catastrophe.

He has compared the credit bubble before 2008 to a carbon bubble now and is very worried.

"It is easy to see the similarities between the financial crisis and the climate challenge we now face," Paulson said this week. "We are building up excesses (debt in 2008, greenhouse gas emissions that are trapping heat now).

"Our government policies are flawed (incentivising us to borrow too much to finance homes then, and encouraging the overuse of carbon-based fuels now)."

Paulson, a former Goldman Sachs boss, has turned the debate on its head. He is saying climate change is as much a financial issue as an environmental one.

Correctly, he has addressed climate change as a financial risk management exercise, rather than purely a debate about science, politics and economics.

Pointing to the potential of the West Antarctic ice sheet to melt and lift sea levels 4m, Paulson argued that apparently small climate events could unleash big surprises.

"It's easy to see a single part in motion. It's not so easy to calculate the resulting domino effect. That sort of contagion nearly took down the global financial system."

This week, Paulson took the unthinkable step for a Republican of calling for a carbon tax.

He argued that discouraging carbon emissions now may save massive public costs and fiscal deficits over decades as governments are forced to pay to clean up after storms, repair damaged infrastructure and invest in ways to cope with rising sea levels, higher temperatures, droughts and more severe storms.

The biggest global companies are beginning to look at the issue of climate change and carbon emissions in the same way: as a long-term financial risk that has to be managed like any other. Even oil giant Exxon Mobil was forced in April to acknowledge the financial risks of climate change, although it rejected suggestions by shareholder activists that its huge oil reserves may end up stranded once regulators and politicians finally catch up with the science and act to reduce emissions.

For years, insurers have been calling for action and adjusting their catastrophe-forecasting models for bigger, more damaging storms.

Last year, insurer AIG issued a report calling on regulators, investors and credit raters to take climate risk into account when assessing insurers.

Corporations and governments should now be building these risks into their financial outlooks which, in turn, should force voters and politicians to face up to the facts.

Our Reserve Bank has just limited riskier mortgage lending to control risks to the financial system from a potential bursting of a house price bubble. Interestingly, it is also the regulator of the insurance system.

How long before it builds climate change risk into its assessments of the strength of insurers? Should it be making recommendations about controlling carbon emissions in the same way it controls the riskiest lending?

This reassessment of climate change as a very real financial risk should jolt voters and politicians out of the vacuum that has sucked the life out of climate change policy debate for years.

Until now, politicians could easily point to the financial costs of carbon taxes as a reason not to take action. Now it's the turn of the bankers, insurers and chief executives to tell politicians and voters about the financial cost of not taking action.

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