This report from the New Economic Foundation’s Lukasz Krebel and Frank van Lerven makes a powerful argument for a green targeted credit policy, offering a detailed proposal for how the Bank of England (BoE) might green its term funding scheme (TFS) and extend it through state-owned investment banks. It includes the outline of a pilot programme targeting energy efficiency retrofits.
The authors begin with the case for targeting lending. Despite the influence of the banking sector on the long-term trajectory of the economy, central banks have retreated from interventionist credit policies that once supported long-term price stability and other economic objectives. Instead they have restricted themselves to using a single instrument (the overnight interbank lending market rate) to meet a single target (a low and stable rate of inflation).
The report argues that this ”blunt instrument” approach fails to account for sectoral differences and cannot counteract the procyclicality of bank lending. It therefore has a limited effect in achieving even the core objective of price stability.
Instead, the report calls for a return to interventionist credit policies, particularly to support the transition to a low-carbon economy and to reduce environment-related financial risks. A finance-led, market-oriented approach to greening finance is not enough, the authors say, pointing to a financial system badly misaligned with emissions targets and to the UK’s green investment gap of £260bn by 2030.
As a solution to this failure, they outline how the BoE might green thescheme , which offers cheap long-term liquidity to banks and building societies on the condition that they increase their lending to households and firms. The BoE could build on this programme to offer zero or negative real interest rates for green activities, they say, while keeping its main policy rate in positive territory. Several options are offered for how such a programme might be applied, including decarbonising the existing programme.
The report also examines how the effects of a green TFS might be amplified by offering it to public finance institutions such as the British Business Bank and the recently created UK Infrastructure Bank.
It ends with a case study of a pilot initiative targeting energy efficient building retrofits, a programme that could be implemented using existing metrics and in advance of the development by the UK of a green taxonomy. The study explores three scenarios focusing on final costs to households, as well examining the macroeconomic implications.
This report was funded by the Sunrise Project, which also funds Green Central Banking.
This page was last updated September 6, 2022
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