Weekly roundup: green inflation and ‘one-for-one’ capital requirements

February 18, 2022|Written by Graham Caswell|Securities & Exchange Commission, Office of the Comptroller of the Currency, Bank of International Settlements, Banque de France, European Central Bank

The green inflation myth, a call for ‘one-for-one’ capital requirements, climate lessons from economic research, US climate disclosure rules and more from this week in green central banking.

Green inflation is a myth, say analysts

Renewables reduce energy costs and are a profoundly disinflationary force, write Kingsmill Bond, Sam Butler-Sloss and James Newcomb of clean energy thinktank RMI.

Responding to recent assertions that more expensive green technologies are driving inflation, they show that in fact the opposite is occurring and that the faster the world deploys renewables, the more money will be saved in energy costs. Solar and wind are already the cheapest forms of new electricity generation in 90% of the world, they point out, and are expected to reduce energy expenditures from their current levels of 3.2% of GDP to less than 1.6% by 2050.

“Fossil fuels are a commodity not a technology,” they point out, and thus are far more susceptible to price fluctuations. Referring to analysis by the International Energy Agency, they make clear that electricity bills are currently rising because the costs of fossil fuels have risen.

Fossil gas price rises dampen economic activity

A new study of gas price increases shows that significant increases in fossil gas prices can dampen economic activity by reducing households’ real disposable income and purchasing power, and also by increasing the costs of industrial production.

Published in this month’s European Central Bank economic bulletin, the study reveals that supply chain linkages also amplify the reaction of goods producers and services providers to gas price increases. This is because most energy consumption is attributed to indirect use embedded in earlier stages of production.

Using a new framework to assess the macroeconomic impact of gas price increases, the analysis shows that a hypothetical 10% gas rationing shock on the corporate sector would reduce euro area gross value added by about 0.7%.

G30 head backs ‘one-for-one’ capital requirements

Stricter capital requirements on fossil-fuel lending can help to redirect a huge flow of funds to necessary climate-friendly projects, writes Stuart Mackintosh, executive director of the Group of Thirty body of central bankers, financiers and academics.

“As a top priority, regulators and central banks should charge banks the real price for their polluting fossil-fuel portfolios, thereby permanently shifting incentives in favor of financing the green transition,” Mackintosh said. “Specifically, banks should be required to pay a ‘one-for-one‘ capital charge for any new fossil-fuel lending,” he argues, referring to the 1250% risk-weight that would require financial institutions to fund such projects from their own resources.

The Basel Committee on Banking Supervision has already proposed an increase in the risk weighting of capital that banks hold against cryptoassets to 1250%, prompting calls from climate campaigners to apply a similar policy to climate-related risks.

Climate lessons emerge from economic research

A Banque de France review of economic research on the adaptation of economies to climate change has found a relatively limited response from companies despite growing physical climate risks.

The analysis finds that while many reports have been published on the effects of increasingly extreme weather events to economic activities, they generally do not take full advantage of an abundant academic literature on the subject. The objective of the review is to bring lessons from this literature to the climate risk debate.

“What might have appeared 30 years ago as a medium-term threat and challenge is now asserting itself as an immediate constraint that is brutally imposed on everyone,” writes author ‪Mathias Lé. He identifies lower agricultural yields, a reduced labour supply and weaker productivity growth as particular challenges, and warns that these medium-term challenges should not lead firms and regulators to underestimate the fact that climate change is already affecting economic activity

SEC moves to finalise mandatory disclosure rules

The head of the US Securities and Exchange Commission (SEC) is “working closely” with commissioners on a proposal for mandatory climate risk disclosure, saying that “generic boilerplate text” won’t help investors.

Responding to pressure from lawmakers to release the delayed proposals, SEC chair Gary Gensler said that investors representing trillions of dollars are looking for more “consistent, comparable and decision-useful information” about the climate risks they face and that “it is essential we get this right”. Faced with corporate resistance against the proposals, Gensler said that three out of four comments received by the SEC supported mandatory climate risk disclosure.

The Office of the Comptroller of the Currency is also facing strong pressure from banking industry lobbyists seeking to delay or water down similar proposals aimed at the largest US financial institutions.

This page was last updated February 18, 2022

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