The document discusses the need for a fundamental rethinking of central banks' monetary policy in light of climate change, emphasizing the insufficient current approach and the necessity for coordinated fiscal and monetary policies to facilitate green public investments. It highlights key actions, including the inclusion of climate considerations in monetary policy operations and the exploration of non-traditional policy tools, while stressing the urgency of addressing climate risks through proactive central bank involvement. The document concludes with a call for a comprehensive evaluation of the impact of monetary operations on climate, urging for the reform of financial systems to support sustainable growth.

1. Redefining Monetary Policy for a Green Transition
• Thorvald Grung Moe
• Research Associate, Levy Economics Institute
• Ex. Central Bank of Norway (Norges Bank)

2. Thesis
o Current trajectory of central bank climate mitigation policy is too timid
o Forceful policy coordination between fiscal and monetary policy required to
support massive green public investments
o Market failure paradigm fails to capture key policy challenges
o Carbon pricing necessary, but not sufficient
o Central banks need to transcend current narrow mandate and re-discover their
original mission: Sustainable growth and maximum employment
o Monetary (and fiscal) policy should be redesigned to make real resources available
for urgent climate investments (incl. RR, credit guidance, direct lending)
2

3. Research questions
A discussion is needed about the extent to which and how
central banks should support their respective government's
sustainability policies (Dikau and Volz, 2021, p. 19)
Use of «Credit guidance policy tools» aimed at steering credit
flows ... is certainly a field where further research is needed
(Chenet, Ryan-Collins and van Lerven, 2019, p. 18)
More research is needed on the most effective policy mix for
climate change mitigation (Krogstrup and Oman, 2019, p. 6)
3

4. IPCC Report: time running out on the 1.5C target
4

5. Network (of Central Banks and Supervisors)
for Greening the Financial System
to help strengthening the global
response required to meet the
goals of the Paris agreement
to enhance the role of the
financial system to manage risks
and to mobilize capital for green
and low-carbon investments
5
As of June 30th 2021, the NGFS consists of 95 members and 15 observers.

6. The Financial Stability Board created the Task Force on
Climate-related Financial Disclosures (TCFD) to improve and
increase reporting of climate-related financial information.
6

7. The ECB has
committed itself
to reducing its
own carbon
footprint in line
with the Paris
Agreement.
7
https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210711~ffe35034d0.en.html

8. ECB to to
include climate
change
considerations
in its monetary
policy strategy
• Expand its analytical capacity in macroeconomic
modelling, statistics and monetary policy with regard
to climate change
• Include climate change considerations in monetary
policy operations in the areas of disclosure, risk
assessment, collateral framework and corporate
sector asset purchases
• Implement the action plan in line with progress on
the EU policies and initiatives in the field of
environmental sustainability disclosure and reporting
8
https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html

9. Climate Action Plan - Annex: Detailed roadmap
of ECB climate change-related actions
1. Eurosystem/ECB staff macroeconomic projections
2. Macroeconomic modelling and scenario analyse
3. Statistical data for climate change risk analyses
4. Market neutrality and efficiency concepts in monetary policy operations
5. Disclosures in line with EU policies as an eligibility requirement in collateral framework
and asset purchases
6. Climate stress-testing of the Eurosystem balance sheet
7. Climate change risks in credit ratings for collateral and asset purchases
8. Climate change risks in the collateral framework
9. Climate change risks in the CSPP
9

10. Opinion:
Central
banks can’t
ignore the
big issues at
Jackson Hole
• Essentially the entire Jackson Hole
symposium – a conference supposedly
focusing on uneven economic shocks – has
taken place as if the climate crisis was not
happening.
https://greencentralbanking.com/2021/08/27/jackson-hole-symposium-live-blog/ 10

11. • A study assessing twelve of the world’s
largest central banks against ten climate-
related policy criteria has found all failing to
align their lending, asset purchases and
regulatory activities with the Paris
Agreement target.
11
https://priceofoil.org/2021/08/24/unused-tools-central-banks/

12. And problems with ESG greenwashing
12
https://www.ft.com/content/86ecb21b-c7da-4197-914a-3e1e8e3c5324 https://www.ft.com/content/0eb64160-9e41-44b6-8550-742a6a4b1022

13. Green investing 'is definitely
not going to work’, says ex-
BlackRock executive
“Investors have a fiduciary duty to maximize
returns to their clients and as long as there is
money to be made in activities that contribute to
global warming, no amount of rhetoric about the
need for sustainable investing will change that”
Tariq Fancy, former chief investment officer for sustainable investing at BlackRock
13
https://www.theguardian.com/business/2021/mar/30/tariq-fancy-environmentally-friendly-green-investing

14. Carbon pricing necessary, but not sufficient
14
• US ECONOMISTS' STATEMENT
ON CARBON DIVIDENDS:
• A carbon tax offers the most
cost-effective lever to reduce
carbon emissions at the scale
and speed that is necessary.
Martin Wolf (FT, 19.2.19)
• The economists’ plan might have
been adequate if implemented
worldwide three decades ago. Now,
it is almost certainly not.
https://www.ft.com/content/2a0d4caa-337c-11e9-bb0c-42459962a812
https://clcouncil.org/economists-statement/

15. Shades of Green
• Only a few central banks have so far
attempted to quantify the carbon
footprint of their own monetary policy
actions … due to “data coverage
problems as well as methodological
issues” (FT, 24.3.21)
15
https://www.ft.com/content/23fe7217-9b65-4bd3-aa75-768a1ee6c4d3

16. «Central bankers note costs of
climate action in cautious report»
• Central banks need to fight climate
change, but all policy options on the
table come with costly drawbacks, so
steps need to be gradual and cautious
• It found that all the options on the table
either hinder monetary policy
effectiveness, increase risk or run into
operational feasibility constraints.
Curtailing the availability of credit
to polluters could have the biggest
negative impact on monetary
policy effectiveness
Tweaking collateral rules could be
difficult to carry out operationally
Skewing asset purchases towards
cleaner investments risked both of
those potential problems
https://www.reuters.com/business/sustainable-business/climate-change-fight-comes-with-big-trade-offs-central-banks-says-report-2021-03-24/ 16

17. «Our primary objective is to keep
prices stable in the euro area»
• Within its mandate, the Governing Council is committed to
ensuring that the Eurosystem fully takes into account, in line
with the EU’s climate goals and objectives, the implications of
climate change and the carbon transition for monetary policy
and central banking.
17

18. Isabell Schnabel, ECB: From green neglect to
green dominance?
Strict adherence to our primary mandate is
crucial in order to safeguard the legitimacy of
our actions as an independent institution.
A reorientation of our policies ... must not
question our commitment to price stability
Which will at times mean that we have to stop
purchasing green bonds, thereby defying the
threat of “green dominance”
https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210303_1~f3df48854e.en.html
18

19. Adam Tooze:
Fiscal policy key
• ‘Co-ordination’ of fiscal and
monetary policy remains
unmentionable—so deep is the
conservative hostility to anything
that might appear to infringe the
independence of monetary
policy
19
A. Tooze (2021): Climate crisis offers way out of monetry orthodoxy

20. Climate finance: How to break out of the box
ICB/IT Regime Non-traditional
Minimalism 1 2
Activist 3 4
20
- Costabile & Epstein (2017): An activist revival In central banking?
- Krogstrup & Oman (2019): Macroeconomic and financial policies for climate change mitigation: A review of the literature

21. Central bank traditional toolbox1
Monetary Policy Prudential policy Other policies
Collateral framework Microprudential instruments Further financing schemes
Standard instruments (OMO) Macroprudential instruments Central bank portfolios
Non-standard instruments Support for sustainable finance
21
https://www.lse.ac.uk/granthaminstitute/publication/a-toolbox-of-sustainable-crisis-response-measures-for-central-banks-and-supervisors-second-edition/
Dikau, Robins and Volz (2020): A Toolbox of Sustainable Crisis Response Measures for Central Banks and Supervisors

22. A developmental
role for central
banks – revisiting
the past
(Dafe & Volz, 2015)
• The inflation targeting (IT) orthodoxy
has had serious implications for
economic policy-making in developing
economies, since central banks with a
narrow IT mandate cannot assume the
“developmental” role that central banks
have historically played in virtually all of
today’s advanced economies in
supporting financial sector and
industrial development.
https://www.die-gdi.de/uploads/media/BP_8.2015.pdf

23. • Federal Reserve Act of 1913 inspired by «discounting» practice of German
industrial banks and the German central bank
• Discounting commercial paper issued by firms with good business plans
(“real bills”)
• Real bill doctrine fell out of favor; today «anything goes»
23
https://www.forbes.com/sites/rhockett/2020/09/30/the-fed-is-a-development-bank--make-it-our-development-bank-again/?sh=7c782a276ab4

24. Some non-traditional policy tools
24

25. Credit guidance – declining effectiveness?
• Bezemer, Ryan-Collins, van Lerven and Zhang (2018): The theoretical case for credit guidance is
strong.
• Chenet, Ryan-Collins and van Lerven (2019): Use of such tools may require greater coordination
between central banks and governments, in particular ministries of finance and industrial policy.
• Angrick and Yoshino (2020): Our results indicate that there are significant similarities in the
transition of monetary policy in Japan and in China. In both economies, window guidance starts
out as a potent monetary policy tool that declines in importance over time. Interbank rates,
conversely, assumed a larger role.
• Dikau and Volz (2021): The Chinese experience suggests that green window guidance can be a
useful tool in a policy effort to align the financial system with climate and other sustainability
goals, but that such policies need to be adapted to the specific context in which they are used.
25
https://www.ijcb.org/journal/ijcb20q2a8.htm https://www.lse.ac.uk/granthaminstitute/publication/out-of-the-window-green-monetary-policy-
in-china-window-guidance-and-the-promotion-of-sustainable-lending-and-investment/

26. Reserve requirements – still in use
• Many central banks (in Latin America) have reduced their reliance on reserve
requirements as a policy instrument in recent decades because they impose significant
costs.
• In particular, reserve requirements create an incentive for borrowers to look for other
sources of funding, for example from abroad or from the unregulated financial
sector. (Montoro & Moreno, 2011)
• Reserve requirement ratios in China are (still) relatively high and adjusted frequently
(Angrick and Yoshino, 2020)
26

27. Direct lending (for green investments)
• BOJ (27.7.21): With regard to monetary policy, the Bank decided to
introduce a new fund-provisioning measure, through which it provides
funds to financial institutions against investment or loans they make to
address climate change based on their own decision
• PBOC (31.7.21): PBOC will provide funds to support financial
institutions in offering preferential interest rates for key projects with
significant carbon emission reduction effects
27
https://www.boj.or.jp/en/announcements/press/koen_2021/data/ko210727a.pdf
https://greencentralbanking.com/2021/08/11/pboc-outlines-approach-to-greening-monetary-policy/

28. New Deal:
Industrial
lending
• «Industrial Advances Act» (1934) added Section 13
(b) to the Federal Reserve Act
• Allowed Fed banks to make loans for working
capital to private non-financial companies
• Regional Fed banks set up Industrial Advisory
Comittees to advice on allocation of credit
• Repealed in 1958 when the «Small Business
Investment Act» was passed by Congress
28
https://www.tandfonline.com/doi/abs/10.1080/09672567.2017.1378691?tab=permissions&scroll=top

29. Market neutrality? (Kuroda, BoJ)
• In conducting operations, central banks should try to affect the overall
macroeconomy while avoiding involvement in micro-level resource allocation as
much as possible.
• (However) ... If private sector investment or loans are decided without taking into
account the "negative externalities" caused by greenhouse gases, does this not affect
the neutrality of resource allocation?
• If there were a portfolio comprising private sector investment or loans that took into
consideration these negative externalities, it may be socially desirable for central
banks to provide funds to correspond to such a portfolio.
29
https://www.boj.or.jp/en/announcements/press/koen_2021/data/ko210727a.pdf

30. The case for
violating
neutrality is
building
• Urgency of climate risk means that all
public policy levers should be employed
• Unconventional monetary policy already
violates neutrality
• ‘Strong form’ neutrality is unachievable,
and ‘weak form’ neutrality is rightly
violated when existential questions are at
stake
30
https://voxeu.org/article/climate-change-and-central-banks-case-violating-neutrality

31. (But) Non-
traditional
policies still
controversial
• Primacy on supporting appropriate level of
private (climate) investment
• Ensuring that central bank balance sheets
accurately reflect climate risk can play a
supporting role
• The literature also contains proposals for more
active roles for financial and monetary policy
tools in spurring a shift from high to low-carbon
private investment, although the appropriateness of
such tools and their interactions with fiscal policy
and political economy considerations require more
analysis.
https://www.imf.org/en/Publications/WP/Issues/2019/09/04/Macroeconomic-and-Financial-Policies-for-Climate-Change-Mitigation-A-Review-of-the-Literature-48612

32. A MMT perspective: Can
we afford to survive?
• Viewed from the MMT perspective, the
government uses the monetary system to
mobilize real resources and to move some of
them to pursuit of the public purpose.
• Affordability is never an important question for a
sovereign government—the relevant question
concerns resource availability and suitability.
32
Nersisyan and Wray (2019): How to Pay for the Green New Deal

33. Summary
• Current NGFS/TCFD/ESG approach complicated and slow, focusing on
categorizing green investments and not excluding brown investments
• Extraordinary efforts by central banks to understand impact of climate on the
financial sector, while we need more focus on protecting climate from
financial sector activities
• Non-traditional monetary policy tools should be revisited, but their
effectiveness may be constrained by market liberalization
• All relevant policy tools should be considered, both for resource shifting and
resource constraining
• Strong case for tighter policy coordination between fiscal and monetary policy
33

34. Conundrum
• Will it be possible to make room
for a massive green public
investment program without full-
scale reform of the current
financial system?2
34
2 Greening finance to build back better (NEF, Positive Money, 2021)

35. Thank you for the attention
35

36. NGFS Report (March, 2021)
• A consistent and comprehensive assessment of the CO2 equivalent (CO2e)
footprint of monetary policy operations is challenging. This is due to data
coverage problems as well as methodological issues that are not specific to central
banks but are likely to be of a larger order of magnitude given the scope, scale and
specificities of their operations.
• At the current juncture, assessing the CO2e performance of some asset classes
that are relevant for monetary policy is difficult.
• For instance, assessing covered bonds and securitisation products, which are
accepted by some central banks as collateral and/or held in policy portfolios,
would likely require a look-through approach on their underlying assets.
36
Adapting central bank operations to a hotter world: Reviewing some options