Central Banks and Climate Change: Mission Impossible?

Abstract

ABSTRACT There is growing presumption that central banks have a significant role to play in addressing environmental challenges, especially climate change. This article explains, on the basis of both theoretical and empirical evidence, that attempting to use existing central bank tools and powers to tackle climate change will prove inadequate to tackle the issue(s) at hand. From a positivist perspective at least—and contrary to the claims made in the literature—the tools that central banks possess are insufficient to make any meaningful contribution to emissions reductions and prevent global heating. This is because many of the proposals made by academics, regulators, and legislators to expand the central bank toolkit to equip banks to tackle climate change suffer from deep conceptual and practical drawbacks when applied in this domain. These critical weaknesses mean that the policy prescriptions that flow from them will be of limited impact; this would likely be the case even if central banks were to obviate their mandates more explicitly and attempt to use such tools to address climate change directly. In so doing, they waste valuable political and economic capital that might be usefully deployed in tackling climate change. The obstacles to using these tools are not political or legal; they are inherent in their operation.