Central Banks and Climate Change. Fit, Opportunity and Suitability in the Law and Beyond

Abstract

Climate change is humanity’s defining challenge for the XXIst century. Its potentially devastating effects are as well-known as government efforts are insufficient. In the collective endeavor to realign incentives in the fight against climate change, central banks have for a long time been absent from the equation. No longer. Central banks are seriously committing to the cause, and promising a more climate-based focus on matters ranging from communication to prudential regulation and supervision, and including monetary policy. This recent shift in attitudes has caught activists and critics by surprise, and resulted in an often-confusing mix of views for and against central banks’ active role in climate change, which paint such role as (un)desirable or (i)legal, raising daunting legal (and non-legal) questions. In this paper we propose a methodology to analyze the problem, by dividing the arguments in three different types: arguments of “fit” that analyze whether central banks can tackle climate change, in light of their mandates; arguments of “opportunity” that analyze when central banks may, or should, act; and arguments of “suitability” that analyze how central banks may (and may not) intervene. A large part of the discussion is clarified by distinguishing between these three. A further distinction offered here is between the arguments that central banks should weigh to decide whether, when and how to intervene (arguments of “duty” or “standard of conduct”) and the way these arguments could be weighed by courts deciding on the legality of central banks’ actions (“standard of review”) which, unsurprisingly, are very different. Finally, this paper combines a comparative analysis of central banks’ mandates, and central banks-related case law, with interdisciplinary insights from network theory, decision theory under uncertainty, and social norms. The arguments clearly favor a more active role by central banks in the fight against climate change, although courts are unlikely to force them to take it. It also points to areas for further research.

Keywords: Central banks, climate change, mandates, monetary policy, prudential regulation, networks, uncertainty, social norms, judicial review

JEL Classification: E42, E52, G18, G28, Q54, Q58