Central Banks

Monday, January 20, 2020 - 07:00

MNI POLICY: BIS: CenBks May Be Climate Rescuers Of Last Resort

By Evan Ryser

WASHINGTON (MNI) - Climate change threatens the price stability targets of central banks and the damage could force them to rescue the financial system again, the Bank for International Settlements said in a research paper Monday.

Central banks may have to become "climate rescuers of last resort" and buy large sets of devalued or carbon-intensive assets, said the paper from the Switzerland-based BIS.

"A new global financial crisis triggered by climate change would render central banks and financial supervisors powerless," said the paper by BIS Deputy General Manager Luiz Awazu Pereira da Silva and co-authors Patrick Bolton, Morgan Despres, Frederic Samama and Romain Svartzman.

Central banks have a role to play in avoiding such an outcome, like providing better analysis of the potential for future damage. Using traditional backward-looking risk assessments and existing climate-economic models is "particularly challenging" and cannot anticipate accurately enough "green swan" risks.

These "green swan" risks -- inspired by Nassim Nicholas Taleb's "black swan" -- include physical, social, and economic damage related to the changing climate.

The BIS also called on central banks to coordinate the fight against climate change, including evaluating carbon taxes and integrating sustainability into financial practices.

"Naturally, the first-best solution to address climate change and reduce greenhouse gas emissions is Pigovian carbon taxation," Agustin Carstens, chief of the BIS, wrote in a foreword to the paper. "This policy suggests that fundamental responsibility for addressing issues related to climate change lies with governments."

Policy makers have only in the last few years begun to tackle dangers from rising storm damage and rules favoring renewable energy over fossil fuels. Bank of England Governor Mark Carney warns climate change has become a major concern to the global economy and President Christine Lagarde has vowed to put climate change on the ECB's agenda. Fed Governor Lael Brainard has said it will be important to "take into account the effects of climate change and associated policies in setting monetary policy."

The BIS was skeptical change can happen fast enough. With many post-World War II institutions under growing criticism, the "unprecedented level of international coordination required to address the difficult political economy of climate change is seriously compromised," the paper said.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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