Central banks have their eye on climate change developments but are unequivocal in their understanding that it falls outside their mandate of ensuring stable prices. Nevertheless, central bankers strive to address the roles they think they must play and some of the thorny issues therein, such as independence from government and communications with the public.
At a Jan. 10 central bank symposium in Stockholm hosted by Sweden’s Riksbank, Bank of Canada Governor Tiff Macklem said he’s often asked two questions: Why isn’t the bank doing more about climate change initiatives and why is it even weighing in on climate change?
Throughout 2022 major central banks aggressively raised interest rates to dampen inflation, attempting to fulfil their mandates even if it meant effectively discouraging the investments governments say are needed to mitigate climate change.
The BoC doesn’t have a formal climate mandate, but Macklem says the central bank does have a role to play since the issue can affect the inflation outlook and the economy’s financial stability.
“For an economy like Canada’s with a large fossil fuel sector, the costs of transition to a net-zero economy are large. We estimated in the range of 10 percent of GDP [gross domestic product],” he said. That translates to a ballpark figure of $200 billion.
“Understanding the potential impacts of climate change on the economy, on inflation, on jobs is essential for us to carry out our monetary policy role.”
Monetary policy expert Steve Ambler, an economics professor at Université du Québec à Montréal (retired), spoke with The Epoch Times about his impressions of Macklem’s position: “It seems to me that … if you scratch beneath the surface, it was mostly the risks from climate policy rather than from climate itself—like the cost of transition and basically governments imposing the switch from fossil fuels to renewables and so forth.”
Ambler said damages from extreme weather events (EWEs), such as hurricanes, floods, and tornadoes, have declined over time. He cited a 2021 report by the Global Warming Policy Foundation on “Impacts of Climate Change: Perception and Reality,” which found that since the 1920s, annual deaths globally from all EWEs have declined by about 96 percent despite the world’s population having more than tripled.
The report also found that global economic losses from EWEs as a proportion of GDP have been declining during the period from 1990 to 2018.
“Any reasonable measure of economic climate risk is decreasing,” Ambler said.
Independence in Jeopardy
Ambler said he’d be very concerned if central banks started “explicitly cooperating” with governments on climate change policies, as it would seriously jeopardize their independence.
Such cooperation would have to “appear explicitly … either as an amendment to, or in the next renewal of its agreement with the government, which happens every five years,” he said.
A question posed to the panellists involved “mission creep.” If deemed, for example, that European governments have been underspending on national security and defence, and if they wanted to spend more in those areas, then would the European Central Bank (ECB) channel funding there? Where would the ECB draw the line on what its mission is?
ECB executive board member Isabel Schnabel differentiated climate change from issues like national security.
“We see that there is a fundamental transformation of the financial markets in response to the challenges from climate change,” she said. However, she also said the ECB needs to stay firmly within its mandate.
“We cannot define our own political objectives. … We have to make sure that we are not getting ahead of governments.”
Ambler suggested that the ECB is the most proactive of the major central banks on climate change policy-making. If the BoC mimicked the ECB’s strategy of extending financing by buying bonds based on “green” considerations, that “would definitely be outside its current remit, and I think would put its operational independence at considerable risk.”
Speaking during a later panel at the Riksbank symposium, U.S. Federal Reserve chair Jerome Powell said, “We are not, and will not be, a ‘climate policy-maker.’” His comments focused on avoiding enactment of explicit legislation to use central banking tools to “promote a greener economy or to achieve other climate-based goals.”
At risk is the U.S. Fed’s independence if it adopts new objectives without a clear statutory mandate, said Powell.
Long-Term Phenomenon
Macklem said that climate is a “huge force on the economy” and that the BoC plans to roll out its first-ever climate disclosure report in the coming months. The bank wants to provide businesses with tools and examples for assessing and disclosing climate risks, he added.
But panellists also pointed to the shortcomings central banks face in dealing with climate issues. Their natural focus is on a much shorter time frame than changes in climate. Furthermore, their tools are designed to conduct monetary policy, which does not encompass addressing the causes and impacts of climate change.
Climate change—which refers to long-term shifts in temperatures and weather patterns—is a much longer-term phenomenon than central banks are used to thinking about, said Beatrice Weder di Mauro, president of the Centre for Economic Policy Research (CEPR).
As such, “their [central banks’] contribution will have to remain small. They cannot internalize this huge externality,” Weder di Mauro said.
Macklem admitted that the monetary policy tools a central bank has at its disposal are limited when dealing with climate change issues. He also referred to the scenario analysis that is currently being undertaken by the BoC and banking regulator Office of the Superintendent of Financial Institutions (OSFI), noting that it is “not the best tool to assess the implications for inflation and monetary policy.”
The U.S. Fed is not as advanced as the BoC and OSFI are in its own climate scenario analysis and its own program involving the six biggest U.S. banks.
“Private companies are much much better placed to assess their own risks, even concerning climate and longer-run things, than central banks would be without hiring a whole bunch of new staff members,” Ambler said.
“The bank doesn’t have any comparative advantage in this. And I don’t think the bank should be spending its resources or the resources of the Canadian taxpayer to get into this field at all.”
Working Within the Mandate
Bank of Japan Governor Haruhiko Kuroda said central banks need to play their roles within their mandates, meaning to consider the overall macroeconomy and maintain “market neutrality.”
“Since central bankers are not elected officials, they should avoid involvement in micro revenue resource allocation as much as possible,” Kuroda said.
He also explained how the BoJ has no specific climate change mandate but that it’s within the bank’s mandate to cooperate with the government, which has policies to commit to the Paris and Kyoto protocols.
Kuroda said the central bank’s policy tools may not be very effective in the climate change arena, and Macklem was also clear about central banks not being the “major players” in that field.
“The tools we have are well-designed for the primary mandates we have and we use those tools to pursue our primary mandates. And as climate change affects those, we will adjust,” said the BoC governor.
Ambler said he could also envision the communication problems central banks would have if they venture deeper into the climate change field.
“Just conveying how monetary policy works is difficult enough. The bank should not go beyond that in my view, and in my opinion, the best response to a question from the press about what the bank is doing about climate change should be ‘Well, look at our five-year agreement with the Government of Canada. It’s not in our mandate. End of story.’”
Green Investments Dry Up
RBC economist Colin Guldimann said in a Jan. 11 note that amid rising interest rates, recession talk, and worker shortages, businesses will likely continue to invest in automation instead of initiatives related to taking action on climate change.
“We’re less sure they’ll invest in the climate-friendly technology,” he said.
Guldimann says that the tech required for the green transition will cost more than what Canada has drummed up in the last few decades and that a bigger burden will have to be borne by Ottawa through measures like subsidies.
Statistics Canada in March 2021 published a table, titled “Climate change investments, by business characteristics,” which showed that 90.7 percent of businesses did not have any planned investments in renewable energy or energy-efficiency measures and only 9.3 percent did. The table also showed that 5.5 percent had those plans but they were delayed due to COVID-19.
A communications officer told The Epoch Times that StatsCan does not have a more recent version of the table but that it is looking into how higher interest rates are affecting companies’ climate change investments.
