Central Banks and Climate Change (Part 1). Does Climate Change Fit in Central Banks’ Mandates?

David Ramos Muñoz; Antonio Cabrales; Ángel Sanchez

ABSTRACT

Climate change is humanity’s defining challenge for the twenty-first century. Central banks have for a long time been absent from the policy picture, but today, this is no longer the case. Central banks are promising a climate-based focus on matters ranging from communication to prudential regulation and supervision, including monetary policy. This sudden shift has resulted in an often-confusing mix of views for and against such renewed focus. Our methodology distinguishes between (1) arguments of “fit” that analyze whether central banks can tackle climate change given their mandates; (2) arguments of “opportunity” that analyze when central banks may, or should, act; and (3) arguments of “suitability” that analyze how central banks may (and may not) intervene. We propose a further distinction between the way these arguments may be considered by central banks themselves (arguments of “duty” or standard of conduct), and the way they may be considered by the courts if there is a legal challenge to action or inaction (standard of review). This first part in a series of two papers analyzes arguments of “fit”, using a historical perspective, and a comparative analysis of different central bank laws. This article argues that climate change fits within the narrower central bank mandates, which are focused on price stability. Climate change affects price stability, and affects multiple elements of the transmission mechanism, which have been considered factors justifying action in the past. Furthermore, climate change presents an aggravated version of the problem of time inconsistency, which justifies the existence of independent central banks in the first place. Other “peripheral” mandates or objectives and “transversal” environmental principles can play a supporting role, but cannot be the main justification for central bank intervention. Prudential regulation and supervision can also be a main point for assimilation, provided the competences allocated to the central bank allow this action. Finally, courts vary widely in their consideration of climate change considerations when scrutinizing governmental action, which makes it difficult to predict the path followed by future decisions on governmental actors. However, central banks are different, and their decisions tend to be considered almost non-justiciable by some courts (US or Canada) and granted wide deference by other courts (e.g., the Court of Justice in the EU). The least deferential, and most intrusive court (the German Constitutional Court) tends to be among those keenest to grant climate change considerations constitutional status. Central banks incorporating climate considerations in their price stability mandates seem to be on relatively firm ground.

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