Supporting the Just Transition

This report from the Inspire research network discusses the socio-economic risks and opportunities posed by decarbonisation. It highlights the “key strategic relevance” of rising inequality on central bank mandates and outlines a roadmap for central banks implementing just transition strategies.

In line with the International Labour Organization and United Nations Framework Convention on Climate Change, the paper defines a just transition as having four core features: decent environmentally sustainable jobs, social participation in policy design and delivery, reduced inequality, and adherence to social, labour and human rights standards.

The authors also explain that just transition strategies intersect with two systemic risks facing financial systems: worsening climate change and increasing inequality.

The paper proposes a three-step roadmap for central bankers and financial supervisors:

• Assess: central banks can improve their understanding of the distributional consequences of decarbonisation by integrating socio-economic implications in modelling toolkits and surveillance, and identifying the most vulnerable sectors, regions and households.
• Advise: central banks can play a supporting role in policymaking in a number of ways including reaching out to key stakeholders, convening broad -based national initiatives, and feeding into international efforts for whole-system transition finance strategies.
• Act: central banks can incorporate just transition principles into supervisory expectations, prioritise sustainable employment in policy operations, and shift policy focus to affected groups (for example through targeted asset purchases and refinancing).

Successfully implementing these steps, the paper argues, would result in better jobs, more effective monetary policy, and reduced risks from climate shocks, as well as avoiding stranded assets, workers and communities.

The paper also addresses the possible challenge of conflicting objectives, emphasising that  arbitrage is possible through a clear hierarchy of objectives within central banks’ mandates. While price stability objectives remain paramount, banks should examine all alternative policy options within such trade-offs and choose those with fewest adverse effects on inequality.