Central Banking’s Green Limits Spark Legal Debate in Sweden

How should a central bank respond to global warming? In Sweden, a body created to monitor government efforts to fight climate change says the law that guides monetary policy needs a serious overhaul.

Cecilia Hermansson, the vice chair of the Swedish Climate Policy Council, is advising the government to include environmental considerations in the Riksbank Act, which is currently under review. She also says an existing proposal to amend the law doesn’t go nearly far enough.

“Climate is mentioned four times in over 2,000 pages,” Hermansson said in an interview.

Central Banking’s Green Limits Spark Legal Debate in Sweden

Sweden’s Riksbank has already taken several steps to design a greener monetary policy. It’s cleansed its reserves of assets tied to pollution, and recently started mapping the carbon footprint of its corporate bond purchase program. In a recent paper, it said global warming was set to lead to the kinds of crises that would force central banks to provide more monetary stimulus.

Central Banking’s Green Limits Spark Legal Debate in Sweden

Magdalena Andersson, Sweden’s finance minister, says the government “hasn’t yet taken a position” on how big a role climate should play in the Riksbank’s mandate. “This is a new proposal,” she said of the climate policy council’s recommendations.

Meanwhile, the Riksbank’s own board members are starting to question the merits of diluting its stated aim of maintaining price stability with climate goals.

Martin Floden, a deputy governor, says monetary policy makers “want to contribute to increased transparency when it comes to the climate footprint.” But he also says that “one must consider what the Riksbank’s mandate is and why we conduct monetary policy in the way we do. Our main task is not to pursue climate policy or even to influence the incentives for how others should do things.”

Henry Ohlsson, another deputy governor, says climate considerations can’t overshadow the bank’s primary tasks of inflation targeting and financial stability. He signaled fiscal policy might be better suited to fighting climate change.

But the Climate Policy Council estimates that only 10% of the stimulus measures outlined in Sweden’s 2021 budget directly contribute to reaching its emissions targets. On Thursday, the government unveiled $5.3 billion in extra fiscal measures, but only $430 million, give or take, are labeled green.

The government is spending a lot more on education, which is “very much welcome,” Swedbank economist Pernilla Johansson said. “But additional investments to meet the climate targets are lacking,” she said.

What Bloomberg Economics Says...

“It’s not yet climate QE or even climate monetary policy, as this would suggest the Riksbank is actively buying assets or setting rates to help de-carbonize the economy. But understanding climate change and taking it into account is a first step in the direction of greener policy making.”

-- Johanna Jeansson, Bloomberg economist

Some aspects of a green monetary policy are uncomplicated, such as keeping foreign reserves free of assets associated with global warming, Floden said. The Riksbank has already dumped bonds sold by local authorities in Canada and Australia for that reason, and may take further steps, he said.

Central Banking’s Green Limits Spark Legal Debate in Sweden

But when it comes to the Riksbank’s latest moves -- estimating the carbon footprint of bond purchases -- Floden says there are “huge measurement problems.” That’s in part because there’s often very little, or even no, corporate data to work with.

In the meantime, most central banks are falling short, according to Positive Money Europe, a climate advocacy group. A “vast majority” of the world’s 20 leading industrial nations perform poorly on monetary and financial policy measures to fight climate change, according to its Green Central Banking Scorecard.

And in the end, price stability and climate policy may overlap, according to the Riksbank’s own analysis. In March, it warned that extreme weather can lead to “greater fluctuation in food, housing and energy prices,” which would affect both inflation and inflation expectations.

©2021 Bloomberg L.P.

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