Current Scholarship
Why the Fed and ECB Parted Ways on Climate Change: The Politics of Divergence in the Global Central Banking Community

Central banks form a global policy community with a historically high degree of convergence around the norms of central bank independence. However, in recent years, climate change has emerged as a topic of clear-cut divergence – most strikingly between the historically similar European Central Bank (ECB) and US Federal Reserve (Fed). We develop a theoretical framework that allows us to explore not only factors pushing towards central bank convergence, but also divergence. We show that in an initial stage of emergence, a largely autonomous process of internal deliberation led the ECB to endorse new climate-related norms, where this dynamic was absent in the United States. In a second phase of cascade, marked by the founding of the Network for Greening the Financial System and a growing body of research on climate impacts and central bank objectives, climate-related norms began to exert limited pressure towards convergence. However, the Fed’s perceptions of political risk constrained its adoption of climate-related policies, and eventually led to a retreat from climate following the re-election of President Donald Trump at the end of 2024.