Central banks and climate change: How they can play a role in managing the fallout

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

How central banks can tackle climate change?

Central banks set interest rates and determine the prices of the goods and services people buy. This, in turn, influences the climate impacts of their consumption patterns.

Interest rates influence the credit in the economy and thus how much the country and its financial sector can allocate to dealing with climate change and on what terms.

Extreme weather events have several impacts on food prices and, thus, inflation. This in turn can influence employment, the ability of debtors to meet their financial obligations and financial stability.

What are the challenges faced by central banks in climate financing?

Central banks authority is not unlimited. They are guided by their legal mandates. They are also constrained by the fact that they are led by skilled, but unelected, technocrats with limited public accountability.

The unelected technical experts making decisions about how credit is allocated has an issue. However, decisions by elected authorities can lead to political interference in decision-making.

What are the associated challenges?

Roles and responsibilities: The Central bank’s ability to respond to climate change depends on the powers and responsibilities stipulated in the laws that create them.

These laws vary across countries, the statutory language has been interpreted differently in different countries.

The carbon neutrality issue: Financial markets are not carbon-neutral. In fact, the allocation of credit is more in favour of more carbon-intensive companies and activities.

What is needed to be done?

The lessons from the webinar have special importance for African central banks. The continent faces acute climate-related risks with limited capacity to manage the risks.

-African central banks must develop the capacity to understand and assess two things: 1. The possible impacts of climate change on monetary and financial stability and vice-versa, and 2. The ability of their societies to deal with the Climate challenges.

Central banks must speak the truth and educate their stakeholders about the monetary and financial stability implications of their policies, activities and conduct.

They also should use their international networks to educate external stakeholders on how global responses to climate change impact their own situations.

Source: This post is based on the article “Central banks and climate change: How they can play a role in managing the fallout” published in Down To Earth on 16th November 2021.