“The costs of stabilising the climate are significant but manageable; delay would be dangerous and much more costly.” This is what the first Stern review on the economics of climate change found in 2006.
Fifteen years later, we witnessed a timid acknowledgement of this fact at the Green Swan Conference, the first high-level gathering of central bankers and financial regulators focusing specifically on climate change and its threat to economic, financial and price stability.
We’ve seen more than 15 central bank governors accept the unfolding climate crisis and their balance sheets’ exposure to climate risk. But all have been in different positions when asked about their responsibility to address this clear and present danger.
Christine Lagarde was perhaps the best in defining the dilemma. “Our house is burning and we are looking away” she said, quoting Jacques Chirac who spoke at the 2002 Earth Summit in Johannesburg.
“Our house is burning and we central bankers could turn to our mandate and pretend that it is for others to act and we should be simply followers,” she continued. “I don’t think so.”
Lagarde then centered climate action firmly within the core price stability mandate of central banks. She defined the climate crisis as an underlying factor which should inform and influence all monetary policy operations, including quantitative easing and collaterals. Climate change should also influence all the tools central banks are given to keep the financial system stable.
The mandate issue is certainly one that has been underlying many of the debates concerning climate change and central banking. Some governors such as Thomas Jordan of the Swiss National Bank or the Fed’s Jerome Powell define these mandates in the narrowest way possible, pointing to the independence of central banks.
This suggests that, despite the scientific recognition of the urgency of climate change, it is still seen as a political issue they don’t want the central banks to get involved in.
Paradoxically, both Powell and Jordan acknowledge the impacts their economies might face from climate change, and the volatility it might bring to price and financial stability. By not addressing those clear risks with decisive leadership, these governors are actually taking decisions that should be considered political. Science is not political, but the failure to respond to it is.
In contrast, Sarah Bloom Raskin, a former member of the Fed’s governing board, warned that the vast scale and unprecedented nature of the climate threat makes a deep and rapid precautionary approach imperative.
She referred to a US political history of making regulatory reforms only as a result of a specific crisis. “This wait and see approach makes little sense in the face of the unplanned and exceedingly high costs [of climate change] to society,” she said.
This belief that markets will fix the crisis is false, she said, warning that market forces are not equipped to manage the transition to a net-zero economy. Financial firms need regulation to help them steer.
So on the one hand we have women who see an unfolding crisis and the vulnerability of a system which is slow in mitigating the risks and protecting itself from its impacts. They get out of their comfort zones and go the extra mile. On the other hand, we have men who see the risk of change and the independence (or privilege) they will lose if they act.
There are nuances in between those positions, of course, and most governors and senior officials draw the line differently. All agree on the responsibility of central banks to do research, and most of them recognise the need for mandatory disclosure at a global level.
The Bundesbank’s Weidmann puts primary responsibility on the private sector’s credit rating agencies and suggests direct action from the European Central Bank only if they fail – and this is a clear and surprising departure from his former position. Meanwhile Yi Gang, governor of the People’s Bank of China, is starting with the least controversial policies such as focusing first on leveraging green finance.
How far will the leaders go and how slow will the others move? This is the trillion dollar question with deep implications for billions of people. And we don’t have another fifteen years to wait.
This page was last updated June 8, 2021
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