FRANKFURT (Reuters) -Central banks need to fight climate change but all policy options on the table come with costly drawbacks, so steps need to be gradual and cautious, an umbrella group of central bankers said on Wednesday, even as the ECB made a plea to act.
With climate change posing a growing risk to financial stability, central banks are examining their own role in driving a transformation.
Options under study include: skewing asset purchases to benefit green issuers or punish energy intensive firms, curtailing the availability of central bank funding to polluters, or asking banks for larger collateral when they pledge polluting assets.
But Wednesday’s report by the Network for Greening the Financial System, a group whose 89 members include the U.S. Federal Reserve, the European Central Bank and the Bank of Japan, took a cautious view. It found that all the options on the table either hinder monetary policy effectiveness, increase risk or run into operational feasibility constraints.
The group has so far failed to reach a consensus on policy action and instead recommended small initial steps.
“The least challenging options to operationalise are the least sophisticated ones in terms of addressing climate related risks,” the group said.
“Owing to the heightened uncertainty surrounding the exact timing and magnitude of climate related risks’ materialisation, the optimal policy for many central banks is likely to be to adopt gradual, predictable, precautionary risk protection measures.”
There has been some disagreement among central bankers about how far they should go to fight climate change. ECB President Christine Lagarde along with former Bank of England chief Mark Carney have advocated central bank action on climate change, but Fed and Bundesbank officials have a taken more cautious stance.
“Climate change could reduce the available space for conventional policy and impair the transmission through the financial system,” Lagarde said on Wednesday. “The short-term costs of the transition pale in comparison to the costs of unfettered climate change in the medium to long run.”
The Fed’s announcement this week that it would establish a new panel to address climate-related stability risks indicates some convergence in views. But it faces political backlash from Republican lawmakers, who say it is overstepping its powers.
Sweden’s central bank on Wednesday also emphasised the risk of failing to act, arguing that climate change could lead to lower growth and inflation volatility, which would make monetary policy more difficult to manage.
“One consequence of this could be that the policy rate is more often at its lower bound and the monetary policy room for manoeuvre is thus limited,” the Riksbank said.
Because it may be difficult to calculate the climate impact of investments, Wednesday’s report suggested policy makers could initially adopt simple, non-numerical rules, such as promoting investments hosted in countries that adopt climate treaties.
Central banks could also play a role in promoting requirements that businesses disclose climate risks, it said.
Among the major changes on the table, it found that curtailing the availability of credit to polluters could have the biggest negative impact on monetary policy effectiveness, while tweaking collateral rules could be difficult to carry out operationally. Skewing asset purchases towards cleaner investments risked both of those potential problems, the group said.
Reporting by Balazs Koranyi in FrankfurtEditing by Matthew Lewis and Peter Graff
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