How Much of a Help Is a Green Central Banker?

February 21, 2022Written by SOAS Centre for Sustainble Finance

A combination of green central bank policies could deliver between 5 and 12% of the emissions reduction needed to reach net zero by 2050, according to this Sustainable Finance Lab paper.

The paper looks at the effects of greening various supervisory and monetary policies including capital requirements, collateral frameworks, asset purchases and refinancing operations. The authors estimate that a targeted central bank intervention could result in a reduction of 100 basis points (bps) in the cost of capital for green sectors.

The authors say the results show that central banks can play a key role in the energy transition, but 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, transport, manufacturing, and utilities and construction.

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

This page was last updated April 13, 2022

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