How can central banks play a role in addressing the climate crisis?
Jay Cullen argues in an article published in the Journal of Financial Regulation that attempting to use existing central bank tools and powers to tackle climate change will prove inadequate to effectively address these issues.
Drawing on empirical and theoretical evidence, he concludes that:
- The responsibility of formulating climate-related policies has been passed on from governments to regulators and more specialised agencies, including central banks.
- Holding central banks accountable through climate litigation for failing to fulfil their climate-related responsibilities yields more promising results than setting up constitutional actions against governments for non-compliance with legislation.
- Even in the case they do try to propose policies to account for climate risks, central banks are not likely to have much impact on carbon emissions because they are equipped with either insufficient or unsuitable tools.
- Central banks should make sure the efforts they put into implementing climate policies does not distract them from the opportunity to adopt new tools and paradigms that would prove more efficient in the long term.
- According to the author, meaningful actions include credit control and credit programme financing using the bank's balance sheet.
Given their current powers and the pressure put on them by governments, central banks actions mostly amount to virtue signalling, but they can still upgrade their tools and mandates to have an actual impact on GHG emissions.