The Costs and Trade-Offs of Green Central Banking: A Framework for Analysis

Radu Șimandan,Cristian Păun

doi:10.3390/en14165168

Abstract

The participation of central banks in the fight against climate change has recently been advanced in several academic articles and policy papers. Since the emerging consensus is that climate change poses financial risks, the envisaged green central banking has a responsibility to address environmental sustainability as a means of promoting financial stability—an increasingly accepted goal of central banks in the post-financial crisis world. Thus far, the pro side of the argument is well represented in the literature, though often the benefits remain implicit: with the help of central banks via monetary and macroprudential policies, a smooth transition to a low-carbon economy would be somehow beneficial to all of us. With this article, we aim to add to this literature by looking at the costs and trade-offs of this course of action in light of the observation that the con side of the proposal has been only marginally addressed. We put forward a framework for the analysis of the costs and trade-offs of green central banking and exemplify the applicability of this framework by studying three cases of central banks for which the transition to green operation has been advanced. We find evidence that if costs and trade-offs are taken into account, the case in favor of greening central banks becomes less straightforward than is currently conveyed in the literature.

Highlights

IntroductionThe first set of arguments supporting this request states that climate change affects how central banks design and carry out their core responsibility: monetary policy
The article is structured as follows: we critically review the literature that advances the idea of green central banking and provide more details on our research objectives, while in Section 3 we present an overview of the research methods employed to achieve these objectives
We present how this institutional framework changes because of the implementation of the most common elements of the green central banking program

Summary

Introduction

The first set of arguments supporting this request states that climate change affects how central banks design and carry out their core responsibility: monetary policy. Evermore severe and unpredictable climate-related shocks erode central bank policy space and complicate the traditional inflation-output trade-off. The second reasoning relates to the task of central banks to ensure macroeconomic financial stability and to the presumed systemic nature of climate-originated economic risks. Beyond this reactive stance of central banks, a proactive strategy is ever more suggested: central banks should take the lead in promoting a green economy, ensuring a smooth transition towards the low-carbon economic and social reality

Objectives

Results

Conclusion