Report: central banks can contribute significant emissions cuts

February 21, 2022|Written by David Clarke

New research has quantified the extent to which central bank action can contribute to emissions reduction. A paper by academics in the Netherlands suggests that a combination of green policies could deliver between 5 and 12% of the amount needed to reach net zero by 2050.

The study looks at the effects of greening central banks’ capital requirements, collateral frameworks, asset purchases and refinancing operations. The authors estimate that a targeted intervention could result in a reduction of 100 basis points (bps) in the cost of capital for green sectors.

The Sustainable Finance Lab report, How Much of a Help Is a Green Central Banker? says the results show that central banks can play a key role in the energy transition. However, it says this must be seen as a complement to, rather than a substitute for, fiscal and regulatory efforts.

In modelling the effects of central banks’ actions, the academics assume that fiscal and regulatory policies are aligned with the net-zero emissions pathway presented by the International Energy Association. They envisage that monetary and supervisory policies would be deployed in such a way as to “drive a wedge” between the cost of capital for green and brown activities within sectors such as energy, utilities and construction, transport and manufacturing.

The policy found to have the greatest potential impact is applying a sustainability dimension to central banks’ collateral frameworks, with an maximum possible effect of 76bps. Refinancing operations are next, with a maximum effect of more than 20bps.

The researchers find that the effects of the policies are amplified if they simultaneously target the renewable energy sector as well as green activities outside the energy sector. The report also stresses the need for central bank action to be closely coordinated with government plans.

While central banks’ green policies have previously been geared towards addressing climate risks to financial and monetary stability, some are now undertaking actions aimed explicitly at assisting the green transition. For example, the Bank of England has overhauled its corporate bond purchase scheme to favour greener companies, saying it was required to do so after being given a new environmental mandate by the UK government.

The report gives an indication of the potential impact of the tools at central banks’ disposal. “Central bankers cannot save the world, but they sure can help!” the Sustainable Finance Lab wrote in a tweet.

This page was last updated February 21, 2022

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