Speech by Jens Weidmann ©Nils Thies

Weidmann: All of us should do more to combat climate change

Bundesbank President Jens Weidmann believes all institutions have a duty to ask themselves how they can contribute to combating climate change within the framework of their mandate. “I am convinced that we all can do more to mitigate climate change, without risking conflict with our very own tasks. And we should do more,” Mr Weidmann said in a speech delivered virtually at the Goethe University in Frankfurt. At the same time, he continued, the division of labour and the boundaries of clearly assigned responsibilities between policy areas need to be safeguarded.

Adequately incorporate climate-related financial risks

Mr Weidmann made it clear that central banks need to more fully embed climate-related developments and risks in their analyses and forecasts. “Both the physical impact of climate change and the transition to a less carbon-intensive economy can be a source of financial risk,” he noted, which is why he believes central banks should also integrate climate-related financial risks into their risk management framework, including the financial risks arising from monetary policy operations. “For this purpose, the Eurosystem has a legitimate interest in making climate-related financial risks more transparent,” Mr Weidmann remarked. “In my view, we should consider only purchasing bonds or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting requirements.

Mr Weidmann argued that the Eurosystem could also contemplate using only those ratings that appropriately include climate-related financial risks. By taking such measures, it could help foster market transparency and standards at rating agencies and banks. In this way, central banks could act as a catalyst for change in the financial system and support climate policies in the EU without overstretching their mandate.

Don’t overload central banks

Mr Weidmann used his speech to warn against overloading central banks with tasks. “Problems arise when monetary policy, financial supervision or banking regulation are pressed into service for other purposes. Each of these domains already has a clearly defined objective,” he explained, cautioning that “at worst, the existing core tasks could end up taking a back seat without the new targets being met”. That is why it would be wrong to use monetary policy as a means of pursuing climate policy, for example, by favouring “green” securities and excluding bonds issued by carbon-intensive enterprises. Otherwise, he reasoned, conflicts of interest might arise. “An active role in climate policy could undermine our independence and, eventually, jeopardise our ability to maintain price stability,” Mr Weidmann warned.

Climate action crucially depends on carbon emissions becoming more expensive, and both emissions trading systems and carbon taxes are effective and efficient tools for raising carbon prices. The decisions to use these tools are a matter for governments and parliaments. Mr Weidmann also used his speech to consider why it is so difficult for politicians to take ambitious and credible climate action. The literature, he noted, suggests that governments may have an incentive to put the climate targets they set on the back burner in order to pursue other goals in the short run. Consequently, businesses lack the reliable perspective they need to make the long-term investment required to transform the economy. The literature indicates that the credibility problem surrounding climate action could be resolved by delegating the task to an independent institution – an independent climate agency – much like central banks were granted independence to conduct monetary policy. However, a recent paper casts doubt on whether such an institution can fulfil the conditions that would truly make this a preferable option. “However, without precluding further discussion, these considerations make one point quite clearly: Central banks should not slip into the role of a carbon agency,” Mr Weidmann remarked.

ECB announces launch of new climate change centre

ECB President Christine Lagarde, who also spoke at the conference, shared Mr Weidmann’s view that central banks are clearly not the main actors when it comes to preventing global heating. “But the fact that we are not in the driving seat does not mean that we can simply ignore climate change, or that we do not play a role in combating it,” she said. Ms Lagarde announced that the ECB is launching a new climate change centre to bring together more efficiently the different expertise and strands of work on climate across the ECB. “Climate change affects all of our policy areas,” she explained. “The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves.”