Net zero meets political reality: why central banks are walking a tightrope

What is going on with central banks’ climate programs?  

As Louie pointed out a few days ago, Bloomberg was forced to retract a story suggesting that the US Federal Reserve was winding down its climate program.  This followed reporting in January that Sam Woods, the head of the UK’s Prudential Regulatory Authority (PRA), had allegedly told Rachel Reeves, the Chancellor of the Exchequer, that net-zero policies were restricting the Bank of England’s efforts to spark economic growth.

These two incidents offer useful insights into how the nexus of central banks, elected lawmakers, and corporate media presents the climate debate to the broader public.

When it comes to the Bloomberg piece, I’m confident that the erstwhile reporter didn’t concoct the story out of thin air.  I suspect that internal discussions at the Fed were interpreted as established policy and leaked to the journalist for some nefarious reason.  Given that Bloomberg was the channel used, the leak probably came from the Fed.  But with Trump, you can never be completely sure.

I mean, the story rings true given that his climate-denying administration is currently putting the Beltway to the sword.

Louie pointed out that the Fed has generally lagged European efforts to introduce climate-related regulations.  I would instead argue that the US approach, to date, has been measured and cautious – in many ways superior to the flailing, but more forceful, policies implemented by the Europeans.  For the life of me, I can’t tell whether the European Central Bank wants to encourage green investing or paralyze the banking system out of fear of the transition risk boogeyman.

When it comes to Trump, though, here’s a somewhat counterintuitive take.  What if he sees the Fed’s climate policy as a useful diversion? Something to keep it occupied while he tears into the broader US economy, and a helpful scapegoat when the wheels come off?

Think about it:  Trumponomics tells us that an American consumer happily shelling out $40,000 for a Chinese EV causes the US to be $40,000 worse off!  And he thinks that massive tariffs, paid by US importers and passed on to US consumers, won’t cause a spike in domestic US inflation!

When it does, of course, he will want to lay the blame squarely on the Fed.  Given that he blamed DEI for the tragic helicopter/plane crash in Washington DC, it’s easy to game this out. He’ll say the Fed’s obsession with climate policy caused them to take their eye off the ball on inflation.  If only they weren’t so “woke”, the beautiful tariffs would have produced rivers of gold for every American.  And cheaper eggs to boot.  

And, of course, roughly half the voting population would buy it.

Now, you could try to argue that the Fed is an independent body and thus inoculated against Trumpian power plays.  If you believe that, though, I’ve got a Brooklyn Bridge to sell you.  Let’s face it, the Fed is just another political pawn on Trump’s board.  The bank’s dabbling in climate risk suits Trump’s political interests much better than outright killing the program.

On the other side of the Atlantic, the vibe is rather different.  Keir Starmer’s Labour government holds a massive majority in the House of Commons.  Many, if not most, of the party’s new lawmakers would eagerly support a more forceful push to net zero and all that that entails.

But Starmer and Reeves are playing the long game.  Their primary goal is to show that Labour’s flirtation with the Far Left, which reached its zenith under leader Jeremy Corbyn, is well and truly done, and that they are capable of sober government by returning the Brexit-bound economy to some sort of steady growth.  To their mind, political survival is contingent on exorcising left-wing vanity projects.

Of course, net zero does not fit in this category at all.  That won’t stop the Tories, the Reform party, and the predominantly right-wing UK press view from casting it in this negative light.  The task for Starmer and Reeves will be to keep the UK’s climate efforts humming while they work to right the economic ship.  The Bank of England and the PRA may be useful conduits for this tightrope walk, provided they are cautious and measured in their statements and actions on climate risk.  

Further on down the line, with the UK economy on sounder footing, Labour may be able to take bolder climate action.  But until that time comes, green initiatives are likely only to be undertaken if it can be demonstrated they help the UK economy in the here and now.  Bullshit platitudes and wonky promises of future economic salvation will count for nothing under this form of short-term Starmernomics.

Reading the Daily Telegraph story on Woods’ comments, you can see how right-wingers are seeking to undermine Labour’s efforts.  For non-UK readers, the Tele’ is the paper of the British Establishment, explicitly pro-Tory and pro-monarchy.  In recent years, you could argue it has also developed a clear pro-Trump undercurrent.

As far as I can tell, the linked piece from the Tele’ is the only reference to the letter sent from Woods to Reeves and Starmer that focuses on climate policy.  The Financial Times reported on the letter too, but concentrated on Woods’ unrelated reference to a concierge service for foreign firms entering the UK.   The entirety of the letter was ignored by every other entity up and down Fleet Street.

If you check out the source material in full, it’s actually pretty humdrum stuff.  Here’s the section on climate:  

“The number of principles that the PRA is required to ‘have regard’ to has substantially increased in recent years, increasing the complexity of the analysis required when making or amending regulation.  Depending on how they are counted, the PRA currently has around 25 such ‘have regards’.  Under the current framework we pay close attention to these ‘have regards’ and expect to be held to account for them when exercising our powers.  However, there is scope to rationalise some of these ‘have regards’ where they form a cluster, for instance in the set of ‘have regards’ which relate to climate and the environment.  By rationalising, we think there is an opportunity to simplify the length and complexity of the analysis underpinning future regulations, with consequential benefits for the cost of regulatory engagement by firms and the efficient use of resources by the PRA.”

There is no suggestion here that net zero is a weighty burden.  Woods is simply saying that policy could be streamlined by simplifying the list of climate-related issues the PRA has to pay heed to.

Clearly, the most banal policy statements will be interpreted in the most negative possible light for Starmer by the right-wing press.  Journalists with an anti-climate agenda will “help” their audience by reading between the lines of anodyne statements, putting words in the mouths of government officials and extrapolating wildly to fit their objectives.

I find the Bloomberg “indiscretion” to be far more benign than the Daily Telegraph’s partisan screed. Only time will tell how much damage Trump will impose on the Fed’s fledgling climate risk efforts, and how much scope the Bank of England will have to enhance the UK’s efforts while a Labour Prime Minister occupies No 10.   

For those of us hoping for action on net zero, though, the stars are not well aligned.  

Indeed, any progress at all over the next year or two will be a miracle.

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