Central Banks and Climate Change

Abstract

Central banks are increasingly called upon to address climate change. Proposals for central bank action on climate change range from programs of “green” quantitative easing to increases in risk-based capital requirements meant to deter banks from lending to climate-unfriendly business. Politicians and academics alike have urged climate risk as both macroeconomic and financial stability risk. Relative to counterparts abroad, the U.S. central bank—the Federal Reserve—has been more measured in its response. This Article offers a legal explanation why. It urges that, despite the substantive importance of climate change, the U.S. Federal Reserve presently has relatively limited legal authority to address that problem head-on. Drawing on insights from corporate finance and macroeconomics, the Article constructs a legal framework—stitching together a variety of Fed laws, regulations, and precedents of practice—to discern why many aspects of climate change sit outside the Fed’s legal remit today. Ultimately, the Article tackles one of the most pressing rule-of-law questions facing the Fed today: What are the limits of the Fed’s mandates to address climate change and how far can the Fed press beyond those mandates to make the economy greener? In doing so, the Article prompts reflection on the ideal role of the Fed vis-a-vis the fiscal authority of the Treasury, the political actors in Congress, and the Chief Executive.