How central banks should navigate the climate change crisis
This is critical given the enormity of the challenge, the crying need for immediate action and the high price of failure. With the UN climate meeting, COP28, just a few weeks away, we must spell out the role of the two main policy levers — fiscal and monetary — and the part that wielders of these two levers — governments and central banks — can play in the battle against climate change.
To borrow, incompletely, from Karl Marx's posthumously published Critique of the Gotha Programme, 1875, the respective role of governments and central banks must be guided by the Marxian principle, 'from each according to its ability' — that is, it must be based on what each is best placed to deliver, without compromising their basic roles: governance, and monetary and financial stability.
Unfortunately, this often entails a trade-off.
Nowhere is the compromise between their swadharma and new responsibilities due to climate change more evident than in monetary policy. The question we need to ask ourselves is: should already-burdened central banks jump into an arena outside their direct remit? Even if there is a tangential case for policy intervention — from the perspective of what climate change means for financial stability — how should central banks approach it?
The 'Low-Cost Financing for the Energy Transition' report, prepared for the G20 meet in New Delhi, estimates the world needs an annual investment of over $4 trillion to take it 'a step closer to a sustainable and equitable global ecosystem'.
That's not small change. Where is this going to come from? From global (read: advanced-country) governments? National governments? Central banks, courtesy, their power to nudge financial sector players? Or, worse, by printing money?
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