US representatives reintroduce legislation to limit fossil fuel financing

US Democrats have introduced a bill that would require the Federal Reserve to bring in policies restricting finance for fossil fuel and deforestation activities. The proposed law would oblige the Fed to force all banks with more than US$50bn in assets and certain non-bank financial companies to align their financing of fossil fuels with science-based emissions targets.

The Fossil Free Finance Act was introduced by senators Jeff Merkley and Bernie Sanders, and representatives Ayanna Pressley and Rashida Tlaib. It is a reintroduction of legislation first proposed in 2021.

The measure would require each bank to reduce its financed emissions by 50% by 2030 and its financed emissions to net zero by 2050. This would align bank lending with US obligations under the Paris Agreement.

It would also prohibit these banks from investing in new or expanded fossil fuel projects, as well as end financing of thermal coal projects after 2024 and discontinue all fossil fuel financing by 2030. In addition, banks would not be able to purchase carbon offsets as part of their efforts.

If banks do not meet these targets, the Fed could require banks to divest their assets that violate the law’s provisions, terminate the banks’ deposit insurance, and impose monetary and criminal penalties on the banks.

In addition, the bill would also place identical requirements on non-banks that are systemically important financial institutions (SIFIs) as designated by the Financial Stability Oversight Council. The council and the SIFI designation were created by Congress following the 2008 financial crisis. It would also add financed emissions to the list of criteria for designating SIFIs. No SIFIs are currently designated.

Finally, the Fossil Free Finance Act would require the Fed to produce biannual reports that identify the level of financed emissions in the US financial system, summarise the commitments of banks to reduce financed emissions, and identify regulatory and legislative options for mitigating the negative economic effects of the net-zero transition on various communities.

Pressley noted in a press conference that “when our federal government allows our nation’s largest banks to bankroll the dirtiest fossil fuel projects, our planet, our people, and our economy suffer”.

Similarly, Markey said that, “the Federal Reserve has a responsibility to protect financial stability, but instability will run rampant if climate chaos grows unabated”.

The bill is supported by 45 civil society organisations, including Public Citizen, Evergreen Action and Americans for Financial Reform.

However, it is highly unlikely that the Fossil Free Finance Act will become law any time soon. It did not pass in 2021, when Democrats had a majority in the House and Senate. This time, Republicans – who are generally more critical of banking regulation and efforts to address climate change – have a majority in the House.