Climate Change: What Role for Central Banks?

Greenhouse gas emissions do not cost anything to their emitters, so climate change is a good example of an externality: in their individual choices, economic agents do not sufficiently take into account the damage that their choices cause to the environment.

The Paris Agreement was a giant step forward, but it must be followed by rapid collective action. The transition to carbon neutrality requires a global effort from all sectors. This includes the finance industry, whose central role was first highlighted in Article 2.1c of the Paris Agreement, which calls for “financial flows consistent with a pathway to low greenhouse gas emission and climate resilient development” (UNFCCC, 2015). In other words, the financial system must play a key role in supporting economic transformation.

Climate change has implications for the missions and operations of central banks. Moreover, while the topic of climate change is relatively new to central banks, it is nevertheless a concept deeply rooted in their traditional mandates and therefore does not constitute a new doctrine or require its invention. Rather, it is a modern and timely interpretation of central banks' long-standing objectives, which primarily require them to preserve price stability and sometimes also to facilitate sustained growth, promote employment or preserve financial stability.