Reforming the mandate for a green Bank of England

The total value of green bonds worldwide may be valued at $900 billion but with banks in the UK alone still making billions of pounds of loans to fossil fuel companies each year ROB MACQUARIE argues it's time for the Bank of England to take an active role in decarbonisation

Central banks helped bail out commercial banks in 2008. Ten years on, we need a central bank ready for a climate bailout. 

‘A transition in thinking and action’. That is what Mark Carney, governor of the Bank of England, says is underway in the financial sector, as it faces up to climate change. But how much action exactly? And is it enough? 

Central banks have started to fret over the potential impact of climate change and the low-carbon transition on the financial system. The crux of the issue is that volatile weather and taxes on pollution share one important feature: they take monetary value away from the private sector. 

In the jargon, floods, storms and the like are known as ‘physical risk’, while changes in value due to technological innovation and climate policy are ‘transition risk’. If either happens on a grand scale - and the nature of climate change is that if the transition doesn’t materialise, the weather will - financial stability will evaporate.

Disclosing risk

The ‘transition in thinking’ to which the governor refers is taking place in the boardrooms of regulators and finance firms, and amounts to a gradual realisation of these facts. 

The action is more varied. The governor was speaking at the inaugural International Climate Risk Conference for Supervisors in Amsterdam, organised by a network of central banks that have recently decided to show leadership on the issue of global warming. It is still in its infancy and officials see themselves as still at the stage of ‘exchanging views and best practices’. 

Meanwhile, governmental policies and initiatives are continuing to take shape. The World Bank counts 67 jurisdictions, representing half of the global economy, that are putting a price on carbon, soon to be joined by China’s nascent emissions trading scheme. The private sector, too, is slowly grinding into motion.

The word of the moment is ‘disclosure’. A growing number of financial organisations and investment firms have made clear their support for more information about which climate risks companies are exposed to and what they plan to do about it. Banks and insurers are checking their vulnerabilities to an escalation in climate risk. 

Of course, every financier’s favourite development is the explosion of the market in ‘green finance’. This is an explosion in relative terms: while the total value of green bonds worldwide, for instance, has soared to $900 billion from less than a third that number 5 years ago, banks in the UK alone still make billions of pounds of loans to fossil fuel companies each year.

Central banks helped bail out commercial banks in 2008. Ten years on, we need a central bank ready for a climate bailout. 

It is simply untrue that growing green will do the trick on its own. Renewables are more than a nice ‘growth opportunity’ - they need to entirely supplant carbon-based fuels in the energy mix.  

Trillions still needed

The fact remains that the sums of investment required to achieve decarbonisation are vast, and the gap between what’s needed and reality is unlikely to be filled any time soon. The hope among the global elite is that the lords of private finance will open the taps and channel funds where the need is most urgent. 

Renewable energy and clean transport still require trillions of dollars in investment to create the systems that will serve a world committed to less than 2 degrees Celsius in global warming. For some, investment means biting the bullet and preparing for the worst.

More and more communities and businesses desperately need resilient infrastructure, especially in coastal cities facing off against slowly rising sea levels. And it bears repeating that there are many island communities for which the 2 degree threshold itself is already beyond the pale

Optimists might point to carbon capture and storage, which promises - presumably to the delight of the fossil fuel industry - the chance to extract CO2 from the atmosphere. Yet this is no carte blanche to polluters. To keep below the 2 degree limit, the world needs to be burning less carbon each year from 2020 onward.

So if oil, gas, and coal companies keep digging fossil fuels out the ground, one of two things will happen. Either the world shoots past the 2 degree mark - and there are alarming reports that this is exactly what the oil companies have in mind - or millions of tons of fossil fuels will go unburned.

By some estimates, 80 percent of declared proven fossil fuel reserves, which are already on the books of major companies, are unburnable if we’re to keep below 2 degrees.  

The future of the planet deserves better than an eleventh-hour gamble on technology like carbon capture and storage. Political leaders need to be bolder. The notion that politics is the art of the possible and that the market will fix a colossal externality of its own making is a rather feeble response to the prospect of widespread catastrophe.

Reforming the mandate

In our latest report, Positive Money turns the spotlight back on the Bank of England. To its credit, the Bank is a leader among central banks on climate issues, with Mr Carney serving as an effective ambassador.

But the officials at Threadneedle Street see their role only as managing the financial fallout, and resist calls to help spur decarbonisation. That’s a fair reflection of the mandate they’ve been set by government: to deliver price stability and safeguard the financial system.

Those goals will become impossible to achieve if we fail to keep the climate under control. In a changing world, politicians should consider changing the goals, through reform of the mandate. 

Our report outlines several ways central bank policies could be adapted to have a better environmental impact. Smarter regulation would disincentivise fossil fuel lending and raise green finance.

The intention is not to pass the buck from democratic governments. Quite the opposite: there is wide scope for fiscal and monetary policymakers to cooperate, as they should have done during the financial crisis, to level public money at the green investment gap.

To preserve accountability, specific choices over allocation of those funds would be left to democratic decision makers.   

Some worry that over-mighty central banks are on the verge of overcapacity. Our critics argue that the legitimacy of monetary institutions, already under strain, would crumble if they adopted policies that favoured green industries.

The point of arguing for mandate reform, then, is to skirt round these objections; the point is to make green action legitimate. Central banks helped bail out commercial banks in 2008. Ten years on, we need a central bank ready for a climate bailout. 

This Author

Rob Macquarie is an economist at Positive Money and author of A Green Bank of England: Central Banking for a Low-Carbon Economy. Further reading on this debate can be found here and here.

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