Central banks lack tools to fight climate change – Nobel Prize winner

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  • Central banks have limited climate toolkit, economist warns
  • Should work to ensure that private banks can finance green investments
  • Hansen won the Nobel Prize in Economics in 2013

LONDON, Oct. 5 (Reuters) – Central banks risk promising too much on how they can respond to challenges posed by climate change, warned a Nobel laureate in economics whose work questions the ability of models economy to cope with uncertainty.

University of Chicago economist Professor Lars Peter Hansen said he was particularly concerned about steps taken by major central banks around the world to stress test commercial banks’ exposure to climate risk.

Co-winner of the 2013 Nobel Prize for his work exploring the limits of economists’ efforts to understand risk and its implications, Hansen argued that policymakers tend to downplay the doubts they privately harbor about their shortcomings in matters. knowledge.

While acknowledging that fiscal policy such as carbon taxes or green technology subsidies can have an impact on reducing emissions, Hansen said the case was not proven for central bank tools ranging from monetary policy to banking supervision.

“Their toolbox is relatively limited and I’m concerned that they project the ability to do things… that they don’t have the power to do successfully,” Hansen said in a telephone interview.

He described the climate-focused stress tests as “a superficial attempt to solve a very difficult problem”, doubting that they could identify exposure to climate risk given the lack of past experience with it and the fact that such an exposure will be played on a range of variables. over as long as 30 years.

“We have to have more in common in the way we think about the problem if we are to have any kind of sensible regulation … on stress tests, they have really taken the plunge,” he told Reuters.

Among the main central banks, the Bank of England launched in June its first green stress tests of the main banks and insurers to assess their exposure to climate risks.

The European Central Bank will carry out stress tests on the climate risk exposure of euro area banks next year. The US Federal Reserve has so far asked lenders to explain how they mitigate these risks, but Fed Chairman Jerome Powell has said he would be open to some form of stress testing in the future. . Read more

THE RISK OF REPUTATION?

Hansen was also skeptical about whether central banks should shift their huge portfolios towards green assets such as low-issuance companies, saying he doubted they had the expertise or internal mandate to make such investments.

It was best to leave that to private banks, he argued, while central banks should focus on accessing appropriate financing, as well as working with the private sector and other actors to better understand. exposure to climate risks.

Part of the push for central banks to develop their climate policies could come from a growing sense of frustration within society that governments have so far failed to tackle rising carbon emissions, he suggested.

But he said there were risks for central banks to stray from their mandates to enter the arena of elected officials.

“Many central banks have done a good job overall in establishing a reputation for reliability vis-à-vis the tax authorities. They could have more to lose in terms of current reputation,” said Hansen.

Editing by Catherine Evans

Our standards: Thomson Reuters Trust Principles.


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