What the U.S. Federal Reserve must do right now; an economic schooling from the European Central Bank on planning for climate risks

While extreme weather and climate disruption are taking hundreds of lives in the US and costing billions yearly, shooting up inflation and food prices, and sabotaging the global economy to the tune of trillions of dollars, the US Federal Reserve, like many bad banks, still fails to take the climate crisis seriously. Meanwhile, economists and the European Central Bank (ECB) have been taking positive action on climate, and they have some lessons for the Fed. When US economists and bankers meet at this week’s Jackson Hole Economic Symposium, these actions on climate from the ECB must be key topics for discussion and action by the Fed.

When the Paris Agreement was signed in 2015, with a focus on keeping global temperature rise below 1.5 °C, many European governments and banks already had goals and plans in place to address climate. Since then the amount of banks taking climate seriously has skyrocketed, and the ECB has also been taking climate into consideration for its economic planning. By reviewing ECB studies and reports, we can see that sticking to the Paris 1.5 °C goal is consistently referred to as a guidepost for banks to orient toward.

The ECB has been taking inspiring first steps towards assessing climate risk, and their first climate stress test exposed risks up to $71 billion to banks. Such stress tests, as we learned from the 2008 financial crisis, are absolutely central to any bank, and not doing such tests risks serious detrimental economic consequences. The ECB climate related stress test exposed vital failings, and the ECB faulted lenders for inadequate management of climate risks, showing a potential for losses in the billions.

A year ago the ECB upped its focus on climate, presenting its action plan to include climate change considerations in its monetary policy strategy. Highlights, which the US Federal Reserve should adopt, include planning for:

• further incorporating climate change considerations into its monetary policy framework;
• expanding its analytical capacity in macroeconomic modelling, statistics and monetary policy with regard to climate change;
• including climate change considerations in monetary policy operations in the areas of disclosure, risk assessment, collateral framework and corporate sector asset purchases; 

These actions are vital, but recent energy problems created by Russia’s invasion of Ukraine, and the resulting energy crunch, are making matters even more urgent. In recent months, instead of turning towards clean energy, many governments have takens steps backwards by spending public tax monies once again backing fossil fuels, even as fossil fuel companies are price-gouging and thus raking in massive war-created profits. As a concrete example of back-stepping, even the relatively climate-friendly German government has green-lighted a restart of dirty coal-fired power. This short-sighted decision harms not only the climate, but long-term economic health too.

Totally discounting any climate arguments, from a purely economic perspective, the health of the US economy is largely based upon the ability to produce and obtain cheap energy. This allows industry to produce products at a globally competitive price, which is key to successful domestic and export markets (think competition with China), and economic stability. The future of energy is especially clean energy, with a priority on solar, and to hold any competitive edge on China, economists argue that billions will be needed to bankroll the growing US solar market.

Recent analysis by the ECB itself shows that firms and banks clearly benefit with increased revenues from adopting green policies early on to foster the transition to a zero-carbon economy. Just as important is that this ECB study says that by not taking into account issues of climate, banks and businesses, and the governments that depend on them for revenue based taxes, will significantly lose revenue on an increasing and exponential basis, due to the irreversible destabilizing nature of climate disruption. Even with these positive lessons, there is still room for the ECB, and the Fed, to improve controls on fossil fuel expansion at the expense of lives and livelihoods in places like Uganda and Argentina.

The ECB is just one of many banks and central banks whose analysis shows they are clearly benefiting by incorporating climate into their most important planning. Climate groups and economists stress the need to do more, and the need for this is as urgent as ever as this week US and global bankers and economists meet at the annual Jackson Hole Economic Symposium. With its melting Grand Tetons glaciers in the background as a stark warning, lessons from the ECB must be taken onboard by Fed managers to act for the climate, and for those suffering the most from climate disruption; largely BIPOC people and those of the Global South who’ve done the least to create climate disruption.

As this brief economic analysis summarizes, there are simply no economic arguments left to oppose rapid and strong efforts by banks to actively support the transition to clean energy. Economic analysis in fact proves exactly this; without a rapid change to create clean energy now, banks, the economy, and governments put themselves at —
increasing risks, along with humanity and the health of the planet.

By: Jason Kirkpatrick and Emily Park

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