Central banks need to step up and help tackle climate change

The Bank of England & The Duke of Wellington. Captain Roger Fenton / Flickr. Public domain.

World leaders have come out fighting in response to Donald Trump’s decision to pull the United States out of the Paris Climate Change agreement. The threat posed to all of us by climate change and environmental catastrophe requires urgent action – so will Trump’s decision derail the world’s ongoing efforts to keep global warming below 2 degrees this century?

The decision has powerful symbolic impacts. The U.S. is the world’s largest polluter after China as well as a major funder of efforts in developing countries to mitigate and adapt to the catastrophic impact of climate change. A recent estimate put the cost of the investment needed to meet the 2 degree target at $5-6 trillion per annum, or around 1/3rd of the European Union’s GDP.

All of this paints a bleak picture – with great powers making reckless decisions which could have a devastating impact on our lives. But while Trump’s intransigence might be an obstacle impossible to overcome, are there other levers of power available for us to influence?

We need fresh ideas. We must stop thinking of ‘green’ finance as a separate entity and begin to consider the role of ‘mainstream’ finance and money flows in seriously tackling climate change. Central banks and financial regulators hold considerable power in steering existing financial flows and creating new ones. So what impact is that currently having upon our environment?

Not so green Quantitative Easing

An example is the European Central Bank, which is currently creating €60bn a month in new money under its ‘Quantitative Easing’ program, which is being used to purchase a range of public and commercial assets across Eurozone member states. They have so far bought £82 billion worth of corporate bonds. The Bank of England, meanwhile, completed its £10bn corporate bond programme in May.

Environmental sustainability and climate change are absent from the criteria central banks use to choose the types of corporate bonds to purchase. Rather they are ‘market-neutral’, basing their decisions on much the same criteria as any other large commercial investor: they purchase high quality, ‘investment grade’ assets. But new research by the London School of Economics’ Grantham Institute released last week suggests that when it comes to carbon-intensity, corporate QE purchases are favouring high carbon sectors.

The researchers found that 62% of ECB corporate bond purchases were from manufacturing, electricity and gas production which are responsible for almost 60% of Eurozone area greenhouse gas emissions but only 18% of Gross Value Added (GVA).  Almost 50% of the Bank of England’s purchases were from manufacturing and electricity production, which produces 52% of emissions but contributes just 11.8% GVA (figure 1).

Figure 1: Contribution of ECB corporate sector purchases programme to the economy (GVA) and greenhouse gas emissions (size of circle)

Source: Maitikainen et al, (2017)The Climate impact of quantitative easing, LSE Grantham Institute, page 16

The research found that the most carbon-intensive sector by emissions, utilities, made up the largest share of purchases for both the ECB and the Bank of England. Meanwhile, renewable energy companies are not represented at all in either Banks’ purchases  or the fast growing ‘Green Bonds’ Market. This is despite the existence of the British Green Investment Bank, recently privatised, and the European Investment Bank which has a strong focus on green investment. None of these types of asset have a sufficient credit rating to be eligible for central bank purchases.

Similar to the symbolic impact of the decision of the American President, a central bank has huge ‘signalling’ power because of its unlimited ability to create new money. When Mario Draghi, the ECB’s president, announced that he would do ‘whatever it takes’ to prevent any Eurozone country suffering a banking crisis, speculative attacks against weaker Eurozone finally stopped.  By supporting big utility companies, central banks may be unwittingly supporting a ‘carbon bubble’ in sectors that otherwise might have seen faster price falls.

Unlike Trump, a number of central banks clearly recognise the risks to financial stability posed by climate change, as Mark Carney’s “Tragedy of the Horizon” speech made clear.

This provides a glimmer of optimism for change. So far central banks’ focus has been confined to encouraging greater ‘disclosure’ by financial market participants in the hope that better information will lead to a natural shift away from carbon sectors, rather than central banks examining their own market activities.

But central banks must go further. Institutional investors are already accounting for environmental and social governance criteria in to their investment decisions. With the world rocked by Trump’s decisions, it is more urgent than ever for us to call upon central banks to do the same and take a step towards mainstreaming ‘green’ finance – for the sake of all of our futures.

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  • Dr D

    I would like to attract your attention to a new paper that introduces a new economic theory for a “Risk Cost of Carbon” and related central bank monetary policy for managing climate systemic risk.

    http://www.global4c.org/journal-publication-global-4c/

    • joebhed

      Thanks, but sorry, Dr. D.
      A Fools Errand. Risk-managing the planet’s survival.
      Seems like Twenty-First Century Cap and Trade.

      No NEED to.
      Take back the money system – and pay for it with equity.
      https://www.govtrack.us/congress/bills/112/hr2990/text

      What risk ?
      It’s OUR money.

      • ChristBurns2YearOlds2

        Take back the money system how? What does taking it back mean. I have heard of “taking things back” being something that wasn’t good.
        Pay for it with equity?
        I am sorry. That is very vague and potentially right wing libertarian which is okay but I feel that I know the genre and I don’t need it.
        I do not click on links if you won’t even give a description of what you think is so important.
        I did check the other guy’s article because the way he described it it sounds interesting.
        You could say that it is cap and trade.
        You could also say that it is a carbon tax.
        While acknowledging that no specific one thing will get us to 100% of our goal, but also that every thing which gets us part of 1% towards our goal is worth more than trillions.
        Surely such proposals are going to be necessary and included, once we get the bitter nihilist global warming obstructing betrayers out of the way?

        • joebhed

          Does Inanity prevail ?.

          I send the link that is proposed legislation to take back the DEBT-money system, and you refuse to open it……. Because I didn’t adequately explain its content.
          It’s proposed legislation…… based on ending the issuance of money as debt.

          That legislation is proposed by Dennis Kucinich, the US’ most progressive Congressman until he was gerrymandered out of his District a few years ago.
          It’s government issuing the money, without debt.
          It takes money-issuance OUT OF the capital markets.
          Cap and Trade relied 100 percent on capital markets. It was dumb public policy.
          A carbon tax is direct enough – the fight being over what to do with the money.
          So no, not a libertarian proposal.

          The opposite of debt-based money – being the Bankers’ Money System used in the U.K. and the U.S., is Equity-based money – historically the Currency School system, and based upon having the government issue the new money needed to advance the economy and fund climate restoration.

          You pay for it once, rather than 2 to 3 times.
          Think Greenbacks.

          The worlds leading central bankers are actually calling for an end to using monetary policy to advance our economies BECAUSE, in this system you need someone to take on more debt in order to have more money. And today, everyone is already debt-saturated.

          The solution is to change to government-issued money, issued as national-equity.

          If you open that link, it contains the whole process for accomplishing what is needed.

          Thanks for your comment.

  • I’m really glad you are raising this – I’m doing the same, based on the work of Matthias Kroll at the World Future Council:

    Central Banks to the Rescue – the Biggest Climate Solution You Have Never Heard Of, by Guy Dauncey, https://thepracticalutopian.ca/2017/05/09/the-biggest-climate-solution-you-have-never-heard-of/

  • joebhed

    Josh,
    You can’t get there (sustainability) from here (debt-finance).
    https://www.theguardian.com/global-development-professionals-network/2016/nov/05/how-a-new-money-system-could-help-stop-climate-change

    Debt don’t work for The Restofus.
    It’s not the central banks you want on your side …….. it’s the ‘money-power’.
    Public Money.

    Let me know if I NEED to explain how.
    Democratizing our central banks is just the icing on that cake.

    Read Dr. Soddy’s “Wealth, Virtual Wealth and Debt.”.

    The Money System Common.

  • ChristBurns2YearOlds2

    Bankers, you should be looking for good will anywhere you can find it.
    How are you even hesitating?
    You know you are building bunkers to escape the wrath of the people. You know that means you acknowledge the potential.
    Why don’t you do this yesterday?
    Keep the receipts when you do it, thou, ultra-special ultra-worthy perfect ultra-competent rich people.

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