Financial Innovation for Climate Justice

Central Banks and Transformative ‘Creative Disruption’

January 4, 2024Published by Climate and Development

Central banks can harness financial innovation to achieve the scale of change needed for just and effective climate action and climate policy experts explain how in this paper. Rather than “anxiously waiting” for the systemic disruption of climate change, the authors say central banks should spearhead the “creative disruption” of monetary policy with climate justice as a policy north star.

According to authors Jennie Stephens and Martin Sokol, climate justice goes beyond the mainstream technocratic focus on reducing emissions, and instead prioritises social, economic and institutional innovations which link technical change with societal transformation by centring on social and economic equity.

As “key controlling nodes” in global finance, the participation of central banks is crucial to address climate justice and reverse the environmentally damaging dominance of extractive finance. Extractive finance relies primarily on income from debt payments which the authors say is constraining the use of investment to reduce climate vulnerabilities at household, regional and national levels.

Although there has been an increase in “green activism” by central banks in the global north, the authors say climate reforms do not go nearly far enough.

For instance, the notion of market neutrality has enabled continued lending to fossil fuel companies, revealing a “dangerously impractical” and unrealistic vision of a climate stable future at the heart of monetary policy, say the authors.

They also say that the “fundamental problem” of global north central banks is that they are not concerned if planetary ecosystems are further destabilised, as long as systemically important financial institutions are able to hedge against associated risks.

However, extreme climate-induced events are projected to be the “primary triggers of the next systemic financial crisis” and can create unpredictable and unhedgeable chain reactions. This means central banks’ short-term efforts to stabilise an inherently unstable system are distorting priorities and increasing the inevitability of major climate-related financial crises.

A paradigm shift is needed in central banking mandates that recognises “that financial stability will only be achieved in the long run if environmental, social and economic stability are prioritised”. According to the authors, this would require reorienting away from a narrow focus on short-term price stability towards a globally coordinated policy mix framework.

This could be achieved through the creation of cross-cutting public sector offices as well as greater cooperation between the global north and south. Such a framework requires aligning monetary policy with a range of other policy areas, such as energy, fiscal, industrial, water and trade.

Rather than stepping in post-disaster, a precautionary approach would enable central banks to transparently distribute costs upfront and invest in reducing global climate vulnerabilities.

Alongside green adaptations of conventional policy options – such as green quantitative easing, preferential green rates and green differentiated capital requirements – the paper highlights various innovative measures for central banks to address climate justice. These include a green world central bank, direct monetary financing for transition without creating debt, and a climate coalition of central banks, as well as the use of carbon coins, climate bailout funds, and digital currencies.

This page was last updated January 8, 2024

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