Weekly roundup: monetary policy will determine greenflation

April 22, 2022|Written by Graham Caswell|Office of the Superintendent of Financial Institutions (OSFI), Bank of Canada, Riksbank

Climate-related price instability, a new transition risk tool, calls for climate justice, civil disobedience from scientists protesting fossil fuel finance, and more from this week in green central banking.

Climate-related inflation depends on monetary policy

Carbon pricing is just one way in which the climate transition may affect inflation, but how this inflation will develop ultimately depends on monetary policy, writes Mikael Apel in an economic commentary for Sweden’s Riksbank.

The precise inflationary effects of responding to the climate emergency depend on a complex relationship between consumption, production, technological development and political decisions, he says, while warning of the considerable uncertainties involved.

Higher inflationary pressures would not necessarily be a problem, Apel suggests, and could counter structural forces such as digitalisation and globalisation which have contributed to low inflationary pressures.

“If the underlying pressure on inflation were instead upwards in the future, there is no corresponding restriction on using the interest rate tool to maintain the inflation target,” he concludes. “Instead, it could help to ensure that central banks’ policy rates can move more permanently away from the lower bound.”

No time for better transition risk data, says Riksbank

The Riksbank has also released the results of a study on transition risks in banks’ loan portfolios, which finds that over half of Swedish bank lending goes to activities that are directly harmful to the environment.

The analysis, conducted jointly with the Swedish Financial Supervisory Authority, applied the Paris Agreement Capital Transit Assessment Tool to measure climate-related transition risks in the banks’ credit portfolios. It found that lending to fossil fuel companies represented the largest part of bank exposures.

Climate risks are a reality and it is important that the banks calculate and manage these risks today, the Riksbank said in a press release announcing the result. “It is no good waiting for better data and fully standardised and harmonised methods to become available,” the central bank said. “It is important that the banks calculate and manage their climate-related transition risks today.”

Canadian regulator outlines climate risks

Canada’s financial regulator has outlined the serious climate-related risks facing the financial system and economy in its annual risk outlook, published this week. The Office of the Superintendent of Financial Institutions (OSFI) warned that climate-related physical and transitional risks are “transversal” because they drive more traditional risks – including credit, market, insurance, operational and legal risks – which could increase over time.

The review references a joint Bank of Canada-OSFI scenario analysis pilot report which describes how delayed action, abrupt global policy changes and a disorderly transition to a low carbon economy would cause deep and dramatic financial stress.

“Federally regulated financial institutions and private pension plans must be prepared and build resilience to withstand an accelerated and abrupt pathway to the reduction of greenhouse gas emitting energy sources,” it says. The report ends with a review of OSFI regulatory responses, including an assessment of “whether current internal targets at institutions and capital buffers sufficiently incorporate related risks”.

Renewables crucial to price stability

Investing in the energy transition is the best protection against inflation, saysMatthias Kroll, chief economist at the World Future Council, in a policy note.

Volatile fossil fuel prices are once again the main problem for central banks in maintaining price stability, Kroll says, with limited capacity available to counteract these disruptions. Supporting the transition to renewable energy systems should no longer be seen as a secondary mandate for central banks, but as a crucial tool to achieve their first mandate – stabilising price levels.

Fossil-fuel price volatility can be controlled by ending financing of the sector in central bank portfolios and by regulating the banking sector, he concludes. Kroll also calls for long-term green climate bonds, a “bad bank” for fossil fuel assets, and transferring special drawing rights to the IMF’s new resilience and sustainability trust.

Climate justice requires debt relief

Central banks and regulators should develop regulations that limit the ability of private creditors to pursue debts to the detriment of climate action by debtor countries, concludes a new report from the Climate and Community Project.

Titled Debt Justice for Climate Reparations, the report outlines key economic and environmental issues based on dialogues with climate and debt justice movement groups. It seeks to connect a looming debt crisis in the global south with the historical responsibilities of the global north for climate change and colonialism.

Climate-vulnerable countries already incur higher borrowing costs because of the risks of natural disasters and other social disruptions brought on by climate change, creating a “doom loop” that will drag poor countries further into debt while conditions continue to deteriorate.

Regulators could impose higher reserve requirements on distressed debt holdings, the report concludes, calling for rules against the imposition of capital controls by central banks to be relaxed or scrapped.

Climate scientists protest fossil fuel finance

The week ended with an Earth Day protest by climate scientists, alarmed at the lack of response to the scale, depth and urgency of the unfolding climate catastrophe. Ten scientists blocked the Untermain Bridge in Frankfurt, gluing themselves to the road to stop traffic.

“Scientists have been warning of the catastrophic consequences of further investments in fossil fuels for decades,” said geologist Prof Nikolaus Froitzheim. “We as scientists have to move from warning to action and support the courageous people of the last generation in peaceful resistance.”

The protest comes days after US climate scientists chained themselves to the doors of a JP Morgan Chase building in Los Angeles in protest at the bank’s role as a major funder of fossil fuel projects. “We’re going to lose everything,” warned Dr Peter Kalmus, a climate scientist at Nasa’s Jet Propulsion Laboratory.

“I’m here because scientists are not being listened to,” Kalmus said while chained to the door. “I’m willing to take a risk for this gorgeous planet,” he added, breaking into tears. “For my sons.”

Kalmus and other scientists involved in the US protest were later arrested.

This page was last updated April 22, 2022

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