Central banks should steer clear of taking on climate change

In a classic example of mission creep, the world's central bankers are going green. They are making a big mistake, says Matthew Lynn.

Christine Lagarde © MANDEL NGAN/AFP via Getty Images

An almost permanent recession. Negative interest rates and a programme of quantitative easing that seems to get less traction with every billion that rolls off the printing presses. You might think that on taking office the new president of the European Central Bank, Christine Lagarde, already had plenty of difficult issues to deal with. And yet she has decided to add to the list by making combatting climate change central to monetary policy at the European Central Bank (ECB).

A new bandwagon

The ECB is reviewing how to incorporate climate change explicitly into its operating mandate so that it affects everything from what bonds or equities it buys to how it funds and tests the stability of the banks. And the ECB isn't the only central bank going green.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The Bank of England's Mark Carney has already outlined plans to incorporate the potential impact of climate change in its stress tests of banks and insurers as well as taking steps to reduce its own carbon footprint (although it turns out it would take more than a thousand trees to compensate for all the flights he takes personally). The new governor may well go further.

The Fed held its first conference on climate change last month. Meanwhile, in Sweden the Riksbank has started selling debt from the provinces of Queensland and Western Australia because of their role in coal mining. The trouble is, is that really the right role for a central bank? Sure, the overwhelming scientific consensus is that climate change is a real issue. But there are two big problems with making it a task for central banks.

Advertisement - Article continues below

To start with, it is an extreme example of "mission creep" Tackling climate change may well involve significant changes in the way we live our lives. We might drastically cut down on our use of cars or reorder the way we work so that we travel less and work at home more. We might ban the use of plastics in supermarkets and hand out subsidies for electric cars, impose stiff taxes on air travel, and, at the most extreme level, reorganise the economy so that it consumes far fewer raw materials and creates less waste. Those are all big questions involving tough choices. So surely they should be settled by democratically elected politicians rather than financial technocrats? It is very hard to see what mandate Lagarde or Carney have for that.

Yet another central-bank bubble?

Next, it will create a bubble and encourage a misallocation of resources. One of the main proposals and the Swedish central bank has already embarked on this is to use the central bank's own portfolio of debt, bonds and equities to direct capital to green projects and take it away from companies and regions that generate high pollution. The next step might well be to print money specifically for climate-change projects, a kind of "Green QE".

And yet surely those projects should pay for themselves? In many cases they already do. Solar energy is now often competitive with coal and oil. Electric cars are already hugely popular. But throwing free capital at the sector will just encourage waste and subsidise projects with no commercial justification. Of all people, a central banker should know the risks of doing that.

Sure, there is some role for a central bank in preserving the environment. It may well be wise to stress test banks and insurers for whether they can cope with extreme climate change, for example, because on some of the doomsday scenarios the costs could be overwhelming. But there is a big difference between that and making it central to monetary policy especially if that means printing money for green bonds, tilting portfolios to environmental companies, or other forms of intervention in the market. Indeed, it is hard to escape the suspicion that central bankers are simply jumping on a fashionable cause. That is not their real job and it is not going to end well.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Global Economy

Who’s going to pay for the war on coronavirus?

Central banks and governments are throwing money at coronavirus to stem the pandemic and prop up their economies. But who's actually footing the bill?…
6 Apr 2020
UK Economy

Coronavirus: Big Brother widens his embrace

The coronavirus crisis has led to a massive expansion of the state into all areas of daily life. Should we be worried?
4 Apr 2020
Global Economy

The charts that matter: recession is here – how deep it will get?

After a week in which US unemployment claims topped six million, John Stepek looks at how the charts that matter most to the global economy are lookin…
4 Apr 2020

Most Popular


House prices and Covid-19

The housing market is in deep freeze – what happens when it thaws out?
5 Apr 2020

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Global Economy

The MoneyWeek Podcast – Russell Napier: how much debt is too much?

Merryn talks to financial strategist and author Russell Napier about the huge levels of debt embedded in the global economy, the governmental response…
3 Apr 2020