Fed is not right place to fight climate change

The latest Republican objection to Sarah Bloom Raskin’s nomination to the US Federal Reserve concerns a possible conflict of interest she had while serving on the board of a financial technology company. Far more disturbing — and far more justifiable as an objection — are her ideas about how to use the Fed to fight climate change.
Using monetary policy to address climate change would jeopardise the bank’s ability to carry out its mandate and threaten its independence. Effective monetary policy balances the need to address the immediate costs of recessions and supply shocks with longer-term goals (and the Fed’s mandate) of stable inflation and maximum employment. The Fed needs to be able to set monetary policy regardless of how it affects the current administration’s policy agenda or political fortunes.
Raskin suggests that the Fed should leverage its independence to create policies that will mitigate future damages from climate change. Yet how to respond to climate change is fundamentally a political question — one that hinges on the values Americans hold and the tradeoffs they are willing to accept. The executive and legislative branches, not the Fed, are the proper forums for that debate.
Raskin argues that long-term inflation and unemployment are affected by climate change. So choosing not to address climate change is itself a climate-change policy — one that goes against economists’ best estimates of how to achieve long-term economic stability. If the Fed takes its dual mandate seriously, the argument goes, it has a responsibility to act.
Such reasoning exaggerates the relationship between Fed policy and actual outcomes for the climate. Consider the potential unintended consequences of the policies that Raskin advocates.
She has suggested, for example, that fossil-fuel companies be denied emergency financing from the Fed during the pandemic because doing so would only prolong the survival of a dying industry. As it stands, the US fracking industry has been slow to recover despite surging oil prices. There is significant debate over exactly why this is and what, if anything, the government should do about it. Under Raskin’s proposal, the Fed would exacerbate fracking’s slow recovery.
Now, it is true that many economists view carbon pricing — in the form of taxes on emissions — as the most efficient method of addressing climate change. In recent years, however, some climate advocacy groups have grown wary of emissions taxes because they not only tend to poll poorly but can also turn parts of the public against climate action more generally. These groups fear that pushing for such taxes would actually hurt the fight against climate change. The point is that purely economic analyses of climate policies are incomplete. Whatever blowback climate groups fear from emissions taxes, it would pale in comparison to public anger over any policy that would result in an increase in the price of fossil fuels, including gasoline.
That brings up a final concern. After the Great Recession, the Fed dropped interest rates to zero and held them there for years. The goal was to spur additional investment, increasing demand for labor and helping reduce unemployment. Given the economic uncertainties of the time, most industries were reluctant to make such investments — despite the cheap financing provided by the Fed.

—Bloomberg