Feb 26, 2024 5 min read

Do central banks have a mandate to act on climate change? Part II

I follow up last week’s discussion on the central bank’s climate mandate with a discussion of what I call the “second best solution.” This comes about when the legislature remains policy inert and the central bank must carry the can to achieve net zero.

AI-generated via DALL-E

This is the second part of my discussion of issues around central bank mandates and climate issues. You should check out Part I before reading this piece.

I ended last week with the observation that relying on finance to address climate change may condemn us to second-best solutions that may be incapable of actually stabilizing the climate. This discussion assumed that our political leaders would continue to shirk their long-term responsibility to address global warming.

If, on the contrary, the political classes fully engage with climate change and coordinate their efforts with financial regulators, we may get the best of both worlds – a supercharged drive to net zero and climate salvation.

As a card-carrying critic, however, I’m less interested in this possibility and want to stay focused on the potential problems. In other words, I will continue to assume that central banks will be forced to act on climate issues without aid from their political overlords.

In this scenario, how do we ensure that we get the second-best solution and not something worse?