The climate crisis threatens economic stability – why are central bankers divided? | Howard Davies | The Guardianhttps://www.theguardian.com/business/2023/jan/20/climate-economic-stability-central-bankersIn the brown corner, so to speak, we find the Fed chair, Jerome Powell. At a conference in Stockholm earlier this month he nailed his colours to the mast. “We are not, and will not be, a ‘climate policymaker’,” he said. Integrating climate change considerations into monetary and banking supervision policies “would have significant distributional and other effects on companies, industries, regions and nations”. Powell, no doubt influenced by the fact that one of Biden’s nominees for the Fed board had to withdraw in the face of congressional opposition to her views on the climate crisis, insists that the Fed should not go there.
Others in the brown camp include Mervyn King, the former Bank of England governor, who argues that taking on climate responsibilities “would put at risk central bank independence”. No greater risk to human life can be imagined. Otmar Issing, the European Central Bank’s first chief economist, has also weighed in. “There can be no such thing as a ‘green’ monetary policy,” he said.
But there are doughty fighters in the green corner, too. Mark Carney, an enthusiast since he led the Bank of England, encourages central banks to “examine how to revise their … monetary-policy operations to be more consistent with the legislated climate objectives”. The ECB president, Christine Lagarde, herself has described the climate crisis as “mission critical”. Frank Elderson, the responsible ECB board member, has engineered a “tilt” in the Bank’s bond-purchase schemes away from firms with high carbon emissions, in favour of more climate-friendly companies and industries. He described the Bank as a “prudent realist,” rather than “an environmental activist” (though some bankers supervised by the ECB would probably disagree). “Banks will be at the forefront of the energy and climate transition, whether they want to be or not,” he said, and the supervisor’s role is to encourage banks to manage their loan portfolios with that in mind.
On the monetary policy front, Isabel Schnabel, the German ECB board member, recently described how and why the Bank would incorporate climate-change considerations in its approach. In addition to “removing the existing bias towards emission-intensive firms,” the ECB plans to make “climate-related disclosures compulsory for bonds to remain eligible as collateral in our refinancing operations”. Tough love.
The ECB seems unconcerned by Powell’s argument that climate policy is not for the central bank, and it justifies its approach by noting that the Bank’s statute requires it to support the EU’s economic policies, in addition to maintaining price stability. But critics warn that the ECB may soon be challenged in court for overstepping its mandate.