April 21, 2015, by Kieran Cooke
The Bank of England – ready to shoulder a climate burden?
Image: Adrian Pingstone via Wikimedia Commons
In the aftermath of the 2008/9 global financial crisis central banks around the world pumped billions of dollars into the monetary system to safeguard the world economy. Now they are being asked to do so again – to tackle climate change. LONDON, 21 April, 2015 – The Green Climate Fund (GCF) – set up in 2010 under UN auspices with the aim of channelling funds to developing countries to fight climate change – is having a hard time of it. The aim was for the GCF to raise US$100 billion per year by 2020: so far total pledges of just over $10 bn have been received by the Fund. Now a new way of funnelling money to the GCF is being proposed, with central banks playing a central role. The idea is for the GCF to issue “Green Climate Bonds” which would be purchased by central banks around the world: the money raised – billions and billions of dollars – would then be used to help fund renewable energy projects and other climate-related projects in developing countries. The proposal is being made by the World Future Council, (WFC), a Germany-based group which helps governments and organisations with policy formulation.
The central banks would, in essence, be enacting similar measures to those undertaken in the aftermath of the 2008/9 financial crisis. To avert money supply drying up and the whole financial system grinding to a halt, the central banks pushed vast amounts of cash onto the market – using reserves and printing money. The WFC points out that central banks cannot go bust in their own currency as they have monopolies on issuing legal tender – even if they purchase assets which give no returns. The Green Climate Bonds would, in effect, be another form of money creation similar in some respects to what’s called quantitative easing – increasing money supply to stimulate the economy. Only in the case of the climate bonds, this new money would be used to combat climate change. Under the WFC’s proposals, between US$100 bn and $300 bn would be raised through green bond purchases each year. The bonds would be valid for at least 100 years and become more or less enduring assets of the central banks, though they would give only a small or no rate of interest. Dr Matthias Kroll, a finance researcher at the WFC, told the Climate News Network that the bulk of green bond purchases would have to be made by central banks in the industrialised world, with the US Federal Reserve and the European Central Bank perhaps each purchasing $20 bn of climate bonds annually.
“But other states with strong currency reserves like China could – and should – take part in the new green finance system”, says Dr Kroll. How the proposal for green bonds will be received among central bankers and governments round the world is unclear. Compared to the sums which have been injected into the financial system by central banks in the wake of the global financial crisis, the amount of money at present being sought to tackle the potentially much more serious problem of climate change is relatively small. The WFC says the Bank of England (BOE) has been among those investigating alternative ways of raising money in order to combat climate change. A recently released research paper by the BOE said that central banks in future may have to respond to the challenges posed by climate change. – Climate News Network
Kieran Cooke, a founding editor of Climate News Network, is a former foreign correspondent for the BBC and Financial Times. He now focuses on environmental issues