Heterodox Economics Newsletter

Issue 239 December 03, 2018 web pdf Heterodox Economics Directory

It is now quite evident that tackling climate change is a major economic challenge of the 21st century. Against this backdrop, I was intrigiued to find that some members of the European Central Banking System are now actively thinking about an agenda on how to incorporate climate-considerations in central banking activities. The first progress report of the associated "Network for Greening the Financial System" explores general options for introducing criteria for assessing the financial risks arising from climate change and the use of fossil fuels - as, for instance, steming from a reliance on emission-intensive inputs or investments in climate-vulnerable sectors - and introducing these criteria in the broader operations related to macroeconomic surveillance and financial stability assessments. Such an approach is surely laudable as it essentially aims to influence the behavior of private actors in the financial sector to engage in similar efforts for assessing risks emerging from climate change and to adapt their investment strategies accordingly. However, the strategy is also cast within the current conceptual and theoretical constraints: it aims to design more appropriate incentive-schemes by employing and extending traditional risk-assessment tools to encourage greater sensibility for climate-concerns and operates fully within the given mandate of the European Central Banking System.

As already said I find this laudable and ambitious because this strategy surely represents a step in the right direction. Nevertheless I wonder, whether such efforts - if successively implemented in due time - would really exhaust the institutional potential of central banks for fighting climate change. In theoretical terms, climate change can be seen as a coordination problem (arising from a repeated prisoners' dilemma) with many, many players. In such a constellation it can often be beneficial to assign a stronger role to centralized decision-making instead of relying on decentralized coordination. Applying this more abstract argument to the case at hand would probably imply an even more ambitious strategy for Central Banks by, for instance, widening their mandate to also engage in financing for more long-term innovations to the benefit of future generations. A concrete proposal could draw, for instance, on Modern Monetary Theory and the works on the entrepreneurial role of the state to provide a clear-cut roadmap for doing so. Such a suggestion would not be that radical as it neither implies to overburden central banks nor would it lead to the conclusion that the state should solely direct the path of innovation; it would rather follow the modest Popperian principle of piecemeal engineering by aiming to develop novel tools for resolving a major problem for the further development of mankind.

Seeing such a strategy complement the efforts currently undertaken by the "Network for Greening the Financial System" would probably induce me to tell my children slightly more optimistic bedtime-stories, so, hey, there is also an incentive-component here!

All the best,

Jakob

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