Prompt for Discussion

Contributors: Daniela Gabor, Jens Van’t Klooster, Steffen Murau, Danny Sufranski, Ulrich Volz, Monica DiLeo, Simon Dikau, David Barmes, Sarah Bloom Raskin, Ulrich Volz, Josh Ryan-Collins

What is central banks’ role with respect to climate policy? In this roundtable, we invite authors to reflect on central banks’ desired role, as well as to take note of developments already underway in some jurisdictions. We are also interested in authors’ reflections on how different paradigms for understanding the role of central banks more generally affect their thinking about central banks’ role in climate policy. The roundtable stems from the observation that these roles are quite varied.

So far, the dominant approach conceives of central banks’ role in the climate crisis primarily in regulatory terms, namely, how to protect banks’ balance sheets from emerging climate risks. In this vein, the past years have witnessed rapid developments in climate stress testing, climate disclosures, and growing interest in climate risk-based capital requirements. What are the potential limitations and shortcomings of this dominant approach?

Meanwhile, in some jurisdictions, the conversation is expanding to conceive of central banks’ role in ways that highlight their credit allocative function. The focus here is not merely on banks vulnerability to climate risks, but to the risks that bank lending decisions themselves pose to the climate. This approach highlights the need to steer banks’ lending decisions to align with the Paris Agreement. How does the credit allocative function of central banks fit within their broader legal and political mandates? What lessons for the climate crisis can be learned from earlier episodes where central banks supported industrial policy? To what extent can central banks facilitate credit allocation through their own balance sheet (collateral frameworks, quantitative easing) as distinct from their regulatory role? What is the role of formal regulations relative to voluntary net-zero initiatives global banks have joined in recent years (e.g., the Glasgow Financial Alliance for Net-Zero)?

A related topic is the future of monetary policy in a warming world. The climate crisis can challenge central banks’ ability to achieve monetary policy goals. For example, some research identifies concerns that supply shocks from natural disasters can severely compromise central banks’ ability to achieve price stability. How should central banks plan to handle the challenges of monetary policy in a warming world? In what ways do discussions about monetary policy inform our understanding of the limitations of the narrower risk- management approach (Bullet 1) relative to a broader credit-allocative approach (Bullet 2)?

While some conceive of central banks’ role primarily in domestic terms, others emphasize its international dimensions. A challenge of climate policy today is the dramatic urgency for climate investments in the Global South. The hierarchy of national currencies, higher borrowing costs, and often crushing debt burdens– all make it difficult for developing countries to mobilize the trillions necessary to decarbonize their economies. Some scholars have raised important concerns with the growing reliance on private international capital flows to fund the green transition in the Global South. Meanwhile, some developing countries proposed to support the climate transition through several specific reforms to the international monetary system. What role should central banks play in supporting green investment to the Global South? How can central banks in key currency jurisdictions support greater monetary policy space for developing economies? What risks does reliance on private capital flows for green investment pose to the global financial system?

Roundtable authors will contribute to our understanding of these, and other, other questions surrounding central banks’ role in averting the climate crisis.