Tuesday, January 18

Central banks and climate change: how they can play a role in managing the consequences

Climate change is a devilishly complex challenge that affects all aspects of our lives. It affects weather patterns, biodiversity, access and sustainability of land and water resources, air pollution, inequality, employment, industrial production, distribution and consumption, and migration patterns.

In other words, climate change can serve as an abbreviated expression for a wide range of complicated and interrelated environmental, economic, political, cultural and social problems.

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Climate change policy makers, therefore, must do more than simply reduce carbon emissions. They must also encourage all state institutions, communities, companies and individuals to participate in the national and international effort to address all aspects of the climate change challenge.

Central banks They are important institutions and should play a key role in these efforts. For example, they set interest rates. This determines the prices of the goods and services that people buy. This, in turn, influences the climatic impacts of their consumption patterns. In addition, interest rates influence the amount of money and credit in the economy and, therefore, how much the country and its financial sector can allocate to tackle climate change and under what conditions.

However, its authority is not unlimited. It is guided by its legal mandates. It is also limited by the fact that they are run by trained, but not elected, technocrats with limited public responsibility.

Therefore, we must pay attention to how they define their role and responsibilities when it comes to climate change.

In a recent webinar central bankers, economists and lawyers explored the role and responsibilities of central banks in addressing the challenge of climate change.

Three lessons emerged from the lively and extensive discussion between the Participants.

What central banks can and cannot do

Impact on the role of central banks: All participants agreed that central banks cannot avoid tackling climate change. An example that was cited was the impact that the greater frequency and severity of droughts and floods and other extreme weather events have on food prices and, therefore, on inflation. Similarly, these events can damage previously productive assets, such as land and buildings, sometimes rendering them unusable. This, in turn, can influence employment, the ability of debtors to meet their financial obligations, and financial stability.

Functions and responsibilities: Participants also agreed that the ability of central banks to respond to climate change depends on the powers and responsibilities stipulated in the laws that create them. These laws vary from country to country, so different central banks will have different powers and responsibilities. Also, the legal language will have been interpreted differently in different countries.

Historically, some central banks have interpreted their authority restrictively. This could mean, for example, that they will only address climate change when it has actually affected price stability. From this point of view, weather is just another factor affecting prices and can therefore be addressed using “standard” policy tools from the central bank. Other central banks interpret their mandates, regardless of how they are worded, more broadly and flexibly. Consequently, they are more open to taking ex ante climate impacts into account when making monetary and financial stability policy decisions.

All participants recognized that climate change can push central banks to review their interpretation of their mandates. But they did not agree with the need to change these interpretations.

The problem of carbon neutrality: Some participants in the round table pointed out that financial markets are not carbon neutral. In fact, they tend to skew credit allocation in favor of more carbon-intensive businesses and activities. For example, these markets tend to allocate more funds to dirty sectors such as oil and gas, cement and steel than to renewables. This means that if central banks, when implementing monetary policy or adopting regulations for financial institutions, do not actively incentivize investment in green industries, their policies and operations are not market neutral and will instead exacerbate climate change.

Other participants argued that unelected technical experts, such as central bankers, should not make decisions about how credit is allocated. This was the prerogative of the political leadership, that is, elected. If politicians want to address this issue, they must. This could include changing the mandates of the central bank, through the political process. If unelected officials assume this power without expressly being granted it, it runs the risk of undermining their ability to implement their primary mandates without political interference.

Whats Next

These three lessons have particular resonance for African central banks. The continent faces acute climate-related risks with limited capacity to manage risks. As a result, African central banks are likely to face intense pressure to help their countries cope with these risks.

However, the resources of African central banks are often already depleted to meet their current monetary and financial stability challenges. These limitations have been further compounded by the Covid pandemic. Balancing these competing pressures is not easy and will only become more challenging as the climate change challenge facing African societies becomes more intense.

Two conclusions follow.

First, African central banks must, at a minimum, develop the capacity to understand and assess two things: the potential impacts of climate change on monetary and financial stability. And the impact of their own policies and operations on climate change and, therefore, the ability of their societies to face this challenge.

Second, central banks must have the courage to tell the truth to all stakeholders. They have a role to play in educating their governments, businesses, and citizens about the implications for monetary and financial stability of their current and proposed policies, activities, and conduct. They should also use their international networks to educate external stakeholders on how global responses to climate change impact their own situations.

The webinar was organized by the Public Finance and Human Rights Project. It is a collaboration between the Center for Human Rights at the University of Pretoria, the Business and Human Rights Initiative at the University of Connecticut, and the Center for Human Rights and Human Rights at the American University of Washington School of Law.The conversation

Danny bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria

This article is republished from The conversation under a Creative Commons license. Read the Original article.


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