Central Bankers Aren’t Using Their Climate Superpowers Yet
Climate policy isn’t moving anywhere near fast enough to cut greenhouse gas emissions. We know that’s partly because it’s been politicized: there’s the pointless “debate” over whether climate change is real, and its more sophisticated cousin that accepts the basic science of atmospheric warming deems action too expensive.
Above and apart from all this sit central bankers, the guardians—and occasional saviors—of our global financial system. They have been heralded as the new heroes of climate policy for simply accepting that climate change is both real and disastrous. Since 2015, when the then-governor of the Bank of England, Mark Carney, delivered an entire speech about climate change, central banks have organized via the Network for Greening the Financial System. The network now boasts some 60-ish members including the central banks of Europe, Russia, Japan, and China (the U.S. Federal Reserve is now perhaps the only major holdout).
Those members might argue they’ve done a lot in the past few years. The NGFS has published more than half-a-dozen thoroughly researched reports, and members from several countries are developing mandatory stress tests or conducting climate scenario analysis across swathes of the financial sector.
But none of that goes very far toward affecting the real economy. As one of the few really powerful technocratic forces in the world, independent central banks are in theory free from political constraints, and thus could bypass the irrationalism that has stymied climate action. But they’ve allowed themselves to be hamstrung from doing so by the mere appearance of taking sides in a dichotomy that’s false to begin with.
The case for central banks to address climate change is certainly clear enough. Climate change will be expensive in any number of ways, from direct damage due to extreme weather to lost labor productivity to the cost of one day stranding high carbon assets. These can all threaten the stability of financial markets, which central bankers are required to preserve. If safeguarding humanity is a kind of side effect of pursuing that mission, we should all hope that they’ll pursue it as vigorously as possible.
Central banks could favor green, or at least non-polluting industries via their asset purchasing programs, or make it more difficult for banks to lend to high emitting industries. These measures have been discussed in NGFS reports and elsewhere, but there’s little sign of them being implemented. Christine Lagarde, the new president of the European Central Bank, has hinted that she’s open to taking more active steps, but it’s far from clear that will actually happen. One staunch opponent to changing the status quo is Bundesbank President Jens Weidmann, who’s also a member of the ECB’s governing council. “Our mandate is price stability, and the implementation of our monetary policy must respect the principle of market neutrality,” Weidmann said in October. “And there could be conflicting goals as soon as monetary policy dictates that you need to step on the brake and reduce the purchase of bonds.”
There’s plenty of evidence that the idea of market neutrality is more often talked about than practiced. Analysis by NGOs and think tanks shows that emergency corporate debt purchases by the Bank of England and the Federal Reserve early in the coronavirus crisis skewed more toward fossil fuels than the broader economy, and academics have shown that ECB purchases have historically shown the same bias. (The preference can also go the opposite direction. The Swiss National Bank says it won’t buy shares of companies that, for example, produce “internationally condemned weapons.”)
In a more orderly world, traditional government policy would be the means to phase out greenhouse gas emissions, and central bankers would simply reflect this via their interactions with a broader market that gradually decarbonizes without their assistance.
But central banks are already making choices that affect industries. By attempting to be “neutral,” they explicitly support the unsustainable status quo.
All the scenarios, stress tests and disclosures in the world will have little effect on climate change if central banks don’t explicitly favor green assets and penalize polluting ones, both in their own investments and market interventions and in the rules they set for financial institutions. Central banks will still grapple with the “political” aspect of climate change if they want to do what’s necessary anywhere near quickly enough to prevent the most severe global warming scenarios. It just won’t be the climate politics of the past that saves us. We need a robust reckoning with what we’re facing now. And it’s still not clear our new heroes are acting fast enough.
Kate Mackenzie writes the Stranded Assets column for Bloomberg Green. She advises organizations working to limit climate change to the Paris Agreement goals. Follow her on Twitter: @kmac. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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