The Costs and Trade-Offs of Green Central Banking: A Framework for Analysis

Abstract

The participation of central banks in the fight against climate change has recently been advanced in several academic articles and policy papers. Since the emerging consensus is that climate change poses financial risks, the envisaged green central banking has a responsibility to address environmental sustainability as a means of promoting financial stability—an increasingly accepted goal of central banks in the post-financial crisis world. Thus far, the pro side of the argument is well represented in the literature, though often the benefits remain implicit: with the help of central banks via monetary and macroprudential policies, a smooth transition to a low-carbon economy would be somehow beneficial to all of us. With this article, we aim to add to this literature by looking at the costs and trade-offs of this course of action in light of the observation that the con side of the proposal has been only marginally addressed. We put forward a framework for the analysis of the costs and trade-offs of green central banking and exemplify the applicability of this framework by studying three cases of central banks for which the transition to green operation has been advanced. We find evidence that if costs and trade-offs are taken into account, the case in favor of greening central banks becomes less straightforward than is currently conveyed in the literature.

The role of central banks in promoting Green finance

“…Their work underscores the transformative potential of central banks in developing economies, where financial systems are often less mature [1]. Contrarily, Șimandan et al offer a nuanced perspective, arguing that the greening of central banks involves intricate trade-offs and costs, thereby complicating the narrative that central banks can straightforwardly promote green finance [2].…”

The Role of Central Bank in Greening the Nigerian Financial System

“…This will require the CBN to take into account environmental factors in its monetary policy, financial stability and development finance decision making. This will not only ensure that the central bank leads by example in the financial sector but will also ensure that the CBN exclude fossil fuels from its development finance programs so that the central bank is not seen as contributing to climate change risk by encouraging lending to businesses involved in fossil fuel activities (Șimandan and Păun, 2021).…”

Financial Measures to Reduce Carbon Emissions in Britain, Japan and the United States: A SWOT Analysis

“…The effectiveness of such measures has been verified in Korea, Russia and other countries [ 11 , 12 , 13 , 14 ]. The financial measures are generally promoted by two key partners: governments and financial institutions [ 15 , 16 , 17 ]. For example, a government can set budget benchmarks and provide financial assistance for carbon-intensive industries (e.g., energy and transportation) to achieve low-carbon development [ 18 , 19 , 20 ].…”