The Unassuming Economist

From a new VoxEU post:

“Central banks have been called on to contribute to fighting climate change. This column presents a framework for thinking about the issue and identifies some major trade-offs and choices. It argues that climate should be a major part of risk assessments and that capital ratios could be used in a proactive way by applying favourable regimes to ‘green’ loans and investments. It also suggests that central banks may want to take several climate change-related aspects into account when designing and implementing monetary policies. However, the central bank should retain absolute discretion to interrupt any action if its first-priority objective – price stability – were to be compromised.”

“The big question, however, is whether central banks can use their monetary instruments to actively promote the fight against climate change (Honohan 2019). Over the last decade, central banks have significantly expanded their balance sheets, often by a factor of five or ten. In many countries, those balance sheets are now commensurate to the size of the national economy.  With such an imprint on the economy and financial markets, central banks could take a more proactive approach to financing the climate transition.

Two possibilities come to mind, both without significant changes to the current operational framework:

• Reorient their asset purchases towards ‘green’ securities
• Modulate haircuts applied to different kinds of collateral used in refinancing operations, thus creating an incentive to detain some and offload others. “

From the European Central Bank:

“This article provides evidence that economies receiving more funding from stock markets than credit markets generate less carbon. Increasing the equity financing share to one-half globally would reduce aggregate per capita carbon emissions by about one-quarter of the Paris Agreement commitment. Our findings call for supporting equity-based initiatives rather than policies aimed at decarbonising the European economy through the banking sector.

Financial markets and global warming

The 2015 Paris Climate Conference firmly put at the heart of the debate on environmental degradation a sector of the economy that may surprise some readers: finance. Accordingly, the leaders of the G20 stated their intention to fund low-carbon infrastructure and other climate solutions by scaling up so-called green finance initiatives. Key examples are the burgeoning market for green bonds, whose issuance reached USD 48 billion in the first quarter of 2019^[2], and the creation of a green credit department by the largest financial institution in the world, the Industrial and Commercial Bank of China.

Somewhat paradoxically, the interest in green finance has also laid bare our limited understanding of the relationship between traditional finance and the environment. Yet it is important for us to understand that relationship, because most of the global transition to a low-carbon economy will need to be funded by the private financial sector if international climate goals are to be met on time (UNEP, 2011). Are expanding financial markets detrimental to the environment? Do they cause harm, for instance, by fuelling economic growth and the concomitant emission of pollutants? Or, do they steer economies towards sustainable growth by favouring green sectors over so-called brown ones? And is there a difference in this regard between credit markets and equity markets? Do they have the same impact on environmental degradation, or does it make economic sense to stimulate one segment of the financial system at the expense of the other?

We explore those questions in this article, which is based on a recent ECB working paper (De Haas and Popov, 2019). Here, as in the working paper, we present novel evidence that, when it comes to addressing climate change, not all financial markets are created equal. As it turns out, stock markets are superior to banks in decarbonising the economy. As we show, for a given level of economic development, financial development, and environmental protection, economies generate fewer carbon emissions per capita if they receive relatively more of their funding from stock markets than from credit markets.”

Continue reading here.

From a paper by Patrick Honohan (Peterson Institute for International Economics):

“Should central banks take more account of ethical distributional and environmental concerns in the design and implementation of the wider monetary policy toolkit they have been using in the past decade? Although the scope to influence a range of objectives is more limited than is often supposed, and while it is vital to not derail monetary policy from its core purposes, central bank mandates justify paying more attention to such broad issues, especially if policy choices have a significant potential impact. Carefully managed steps in this direction could actually strengthen central bank independence while making some contribution to improving the effectiveness of public policy on these matters.”

From a new paper by Valerie Grossman, Enrique Martínez-García, Luis Bernardo Torres and Yongzhi Sun:

“This paper investigates the impact of oil price shocks on house prices in the largest urban centers in Texas. We model their dynamic relationship taking into account demand- and supply-side housing fundamentals (personal disposable income per capita, long-term interest rates, and rural land prices) as well as their varying dependence on oil activity. We show the following: 1) Oil price shocks have limited pass-through to house prices—the highest pass-through is found among the most oil-dependent cities where, after 20 quarters, the cumulative response of house prices is 21 percent of the cumulative effect on oil prices. Still, among less oil-dependent urban areas, the house price response to a one standard deviation oil price shock is economically significant and comparable in magnitude to the response to a one standard deviation income shock. 2) Omitting oil prices when looking at housing markets in oil-producing areas biases empirical inferences by substantially overestimating the effect of income shocks on house prices. 3) The empirical relationship linking oil price fluctuations to house prices has remained largely stable over time, in spite of the significant changes in Texas’ oil sector with the onset of the shale revolution in the 2000s.”

 

From an IMF working paper by Signe Krogstrup and William Oman:

“Climate change is one of the greatest challenges of this century. Mitigation requires a large-scale transition to a low-carbon economy. This paper provides an overview of the rapidly growing literature on the role of macroeconomic and financial policy tools in enabling this transition. The literature provides a menu of policy tools for mitigation. A key conclusion is that fiscal tools are first in line and central, but can and may need to be complemented by financial and monetary policy instruments. Some tools and policies raise unanswered questions about policy tool assignment and mandates, which we describe. The literature is scarce, however, on the most effective policy mix and the role of mitigation tools and goals in the overall policy framework.”