Will Lagarde do ‘whatever it takes’ to save the Earth?

For the past decade, politicians in the rich world have relied too much on central banks to solve their problems of weak growth and high unemployment. They may be about to do the same with climate change.
Central bankers have started to make their voices heard on the threat of carbon emissions. From worries about how financial institutions might withstand climate shocks to analysis of how global warming will affect national economies, it certainly makes sense to look at what role there is for regulators and monetary policymakers.
But they should be careful about roaming too far beyond their guiding objectives. Privileging “green” assets, for example, would put them squarely at the center of a political debate. It’s up to politicians to lead the fight for the environment as they have the democratic mandate to reward or punish certain sectors through investment, regulation and tax policy.
In fairness, the Bank of England’s Mark Carney deserves credit for insisting that bank governors can’t ignore the environmental problem. In a speech in 2015 he spoke about the “tragedy of the horizon”, whereby climate change will only become an issue for central banks when it’s too late.
Benoit Coeure of the European Central Bank has also done useful work on how climate shocks might affect inflation because of the impact on things like crops and transport. Then there are second-order effects such as mass migration and how that would play into the the labor market.
While such analysis is helpful, central bankers are on dodgier terrain when they try to set climate-friendly policies. The actions of the ECB, the BOE and others are bound by precise mandates, confining their actions to certain tasks such as preserving price stability. This helps technocrats defend themselves against accusations of their acting in undemocratic ways. Given the backlash against experts, it’s a vital protection.
So central bankers should be wary of expanding their mission, as Bundesbank president Jens Weidmann warned last week. “A monetary policy which pursues explicitly environmental policy objectives is at risk of being overburdened,” he said.
The fight against climate change has to start with politicians. They must force companies and consumers to pay higher prices for pollution, for example via carbon taxes.
The alternative is what we have seen so often since the banking and sovereign debt crises: Politicians leaving it to central banks to solve politically difficult problems. This habit has already put the ECB and its ilk under enormous pressure. Another burden would be too much.

—Bloomberg

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.