How central banks can trigger a massive reduction of global CO2 emissions and tackling the pandemic crisis by using new tools of green bonds and guarantees
Hamburg, 13 May 2020 – A new study by the World Future Council was released today that shows that central banks could achieve a massive reduction of global CO2 emissions whilst tackling the pandemic crisis by using new tools. This could be realised without increasing the money supply by reinvesting matured assets from previous purchase programmes.
The study “Tackling the climate crises and the corona pandemic recession” provides new tools (consisting of new Green Bonds and Guarantees) to support global climate finance and tackling climate change in this way. The tools can be integrated into the regular monetary policies of central banks without compromising their primary objectives or affecting their independence. The new tools will also enable central banks to stimulate the economy in a direct way, which is more efficient than the previous pure asset purchases and can reduce unintended spill-over effects (which are recently criticized by the German Federal Constitutional Court).
“Today, it could be regarded as mainstream among central banks that the climate crisis is part of their mandate because it will also threaten financial stability”, says author and chief economist of the World Future Council Dr Matthias Kroll. This insight led to the establishment of the new central banks and supervisors ‘Network for Greening the Financial System’ (NGFS) in 2017.
“However, climate change is yet not reflected in their monetary policies in contrast to other systemic risk situations: For the 2008 financial crisis and the current coronavirus pandemic central banks spent and are spending trillions and multiplied their balance sheets to overcome the threat. In fact, central banks need new monetary tools, which can tackle both problems at the same time: Stimulating the economy in a direct way in the corona recession and supporting global climate finance on a scale which can stop climate change” Kroll concluded. The involvement of central banks in the field of supporting climate finance is crucial, because the massive shortfall of green investments is not a lack of ‘green’ capital, but a lack of enough bankable projects. The objective of the new tools should be to make them bankable.
The study shows that the necessary amount to meet the 1.5°C limit from the Paris Agreement is only a fraction of the sum used during the other systemic crises. In a first scenario it is estimated that a 37 percent reduction of global CO2 emissions until 2030 can be triggered only if the ECB operates with the new green bond and guarantees tools annually to the amount of €150bn (which is only 20 percent of their recently announced €750bn purchase programme to combat the pandemic crisis). If more central banks from the industrialised world will meet their responsibility in this important field, a significant larger effect could be possible. Ultimately, a reduction of all global greenhouse gas emissions to net zero until 2040 is then possible.
The study can be downloaded here.