Central Banks and Climate Change

78 Pages Posted: 24 Nov 2020

See all articles by Christina Parajon Skinner

Christina Parajon Skinner

University of Pennsylvania - The Wharton School

Date Written: October 1, 2020

Abstract

Central banks are increasingly called upon to address climate change. Proposals for central bank action on climate change range from programs of “green” quantitative easing, to increases in risk-based capital requirements to deter banks from lending to climate-unfriendly business. Politicians and academics alike have urged climate risk as both macroeconomic and financial stability risk. Nevertheless, in the U.S., the Federal Reserve has been measured in its response to climate change.

This article considers the scope of the Fed’s policy and legal authority to address climate change. Drawing on insights from corporate finance and macroeconomics, the article first considers how climate risk presents risks that are policy problems for the Fed. From that policy basis, the article constructs a legal framework — stitching together a variety of Fed laws, regulations, and precedents of practice — to discern where the Fed can legitimately move forward on climate change and the areas that, at present, sit outside the Fed’s legal remit.

The article concludes that the Fed’s authority to address climate change is strongest in a responsive posture — that is, to respond to climate-related economic shocks and to tailor supervision to better account for encroaching operational risks and asset-quality deterioration. However, the Fed lacks a solid legal basis for seeking to proactively make the financial system greener. Ultimately, the article prompts some reflection on the ideal role of the Fed vis-à-vis the fiscal authority of the Treasury, the political actors in Congress, and the Executive.

Keywords: Central Banks, Federal Reserve, Climate Change, Monetary Policy, Law and Macroeconomics

Suggested Citation

Skinner, Christina Parajon, Central Banks and Climate Change (October 1, 2020). Available at SSRN: https://ssrn.com/abstract=3703142 or http://dx.doi.org/10.2139/ssrn.3703142

Christina Parajon Skinner (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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