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New report: Central banks, climate change and the transition to a low-carbon economy

Central banks have the power to tackle the urgent problem of climate change. It’s time for policymakers to seize the opportunity of using them to help the green transition, write Josh Ryan-Collins and Frank van Lerven from the New Economics Foundation in their latest report.

 

Since 2015, the QE for People campaign has been exploring ways that the ECB’s quantitative easing programme can be used to finance investments in green infrastructure and renewable energies. It is commonly known as “Green quantitative easing.”

 

However, as we pointed out recently, central bankers and policymakers have so far neglected the ECB’s role in mitigating the climate change issue.

 

The New Economics Foundation, early partners of our campaign have released a briefing note aiming to explain how central banks should play a more prominent role in supporting a low-carbon transition. The report also outlines key policy interventions that could help central banks address the growing challenges of climate change. In particular, a focus on greening macroprudential policy, green credit allocation interventions, and “Green QE” is strongly recommended.

The need for sustainable investments

The risks climate change pose are on a global scale. In response to this threat, the 2015 Paris Agreement commits the world to limiting the global temperature rise to well below 2° Celsius to help avert planetary catastrophe. There is widespread agreement amongst governing bodies that the principal cause of rising global temperatures is due to the rise in greenhouse emissions caused by burning fossil fuels. Therefore, some central banks have launched a number of initiatives to help stimulate financial support for achieving the transition to a low-carbon economy. As these market-orientated initiatives focus mainly on mobilising existing private capital from institutional investors, the results have been disappointing and the low-carbon investment ‘gap’ remains huge.

What central banks are not doing

The role of central banks in supporting the transition to a low carbon economy has been largely neglected. The mantra uttered by central bank senior officials is they are guided by ‘market neutrality.’ Yet market inefficiencies can only be corrected by central banks and it is only central banks who have the capacity to embed the finance sector with an outlook more favourable to protecting the environment.

 

The banking system creates between 85% and 97% of the money supply. Whilst governments and non-bank financial intermediaries – like pension funds – tax and spend existing money, banks create new money and purchasing power via the act of lending. At the aggregate level, their lending decisions have the power to shape the long-term trajectory of the economy.

 

Central banks have responsibility over large swathes of financial regulation and their powers enable them – should they choose – to influence the allocation of private-sector credit and financial flows.

 

Whilst central banks have played a more active role since the financial crisis, this has amounted to very little on supporting the low-carbon transition. As monetary policy and financial regulation are generally viewed as technocratic fields, pressure for this to change from politicians, the media, civil society or citizens has been less than forthcoming.

 

KEY POINTS:

  • Central banks are publicly owned institutions. Their mandates should support the long-term public good, and environmental sustainability should be included in these objectives.

  • Financial stability is a key part of existing central bank mandates, and climate change poses systemic risks to the financial system. There is therefore a clear case for a more interventionist approach.

  • Current central bank policy risks reinforcing the current ‘carbon lock-in’ of energy systems centred upon fossil fuels, which endangers financial stability and undermines the Paris Agreement on climate change.

  • The focus of financial regulators on encouraging greater disclosure of financial institutions’ exposure to climate change related shocks is welcome but insufficient given the urgency of action required.

  • Policy must be redesigned to strengthen financial resilience, so that policy responses help the financial system absorb shocks, whilst adapting and transforming it so that it is less susceptible to future risks of climate change.

 

You can download the report here.

 


 

 

Picture Credit : Flickr


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