Abstract
Abstract Timely and effective climate action is a precondition for the stability of the global financial system and for long-term, inclusive prosperity. Because the Federal Reserve and other central banks share responsibility with legislative and regulatory authorities and other experts for maintaining financial system stability, the Fed also shares responsibility for effective climate action. For climate action to be effective in reducing greenhouse gas emissions and limiting global warming, it must be widespread, it must be substantive, and it must come sooner rather than later. The new low-interest rate monetary policy environment favors sustainable long-term, but also high-risk, investments. Market participants need timely guidance and support from regulatory and supervisory authorities, including the Federal Reserve, in order to expedite global fund allocations to low-carbon assets.
Highlights
The Great Recession established beyond a doubt that the ability of the Federal Reserve to fulfill its dual mandate of price level stability and maximum sustainable employment critically depends on financial system stability
46 Journal of Central Banking Theory and Practice financial system will become increasingly difficult to maintain when confronted with the steep losses in GDP and increases in inequality that are projected for the end of the century if current trends for greenhouse gas emissions continue (Burke et al, 2015; Auffhammer, 2018)
Because the responsibility for a stable financial system is widely shared among regulators, lawmakers, the media, academics and other experts (Admati, 2017 and 2019), the responsibility to successfully address the threats from climate change is shared as well (Cœuré, 2018; Campiglio, 2018)
Summary
The Great Recession established beyond a doubt that the ability of the Federal Reserve to fulfill its dual mandate of price level stability and maximum sustainable employment critically depends on financial system stability. To avoid massive economic disruptions from the physical consequences of climate change and a potentially abrupt shift away from high-carbon assets, the Federal Reserve must act to help orchestrate a smooth transition to a low-carbon economy. The urgent need for timely action to reduce greenhouse gas emissions, which increase average global temperatures and induce anthropogenic climate change, has long been recognized (AAAS, 2014). The timing of effective climate action critically determines the speed of climate change mitigation and its ultimate success with stabilizing global average temperatures and the many interconnected systems on which our lives depend. Since the Federal Reserve shares responsibility for the stability of the global financial system, it must move expeditiously to assume its position as key catalyst and supporter of the low-carbon transition
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