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Central Banks And Climate: A Case Of Mission Creep

November 26, 2020

By Paul Homewood



We are well accustomed to Mark Carney’s efforts to turn the Bank of England into the Bank of Green.

We have probably all half sensed the dangers inherent in it, but have found it difficult to put into words.

Step forward John H Cochrane, who has penned this excellent article explaining the path we are all heading down:



The following is adapted from John H. Cochrane’s remarks at the European Central Bank’s Conference on Monetary Policy: Bridging Science and Practice. His full presentation about the challenges facing central banks is here.

Central banks are rushing headlong into climate policy. This is a mistake. It will destroy central banks’ independence, their ability to fulfill their main missions to control inflation and stem financial crises, and people’s faith in their impartiality and technical competence. And it won’t help the climate.

In making this argument, I do not claim that climate change is fake or unimportant. None of the following comments reflect any argument with scientific fact. (I favor a uniform carbon tax in return for essentially no regulation, but this essay is not about carbon policy.)

The question is whether the European Central Bank (ECB), other central banks, or international institutions such as the International Monetary Fund, the Bank for International Settlements, and the Organization for Economic Co-operation and Development should appoint themselves to take on climate policy—or other important social, environmental, or political causes—without a clear mandate to do so from politically accountable leaders.

The Western world faces a crisis of trust in our institutions, a crisis fed by a not-inaccurate perception that the elites who run such institutions don’t know what they are doing, are politicized, and are going beyond the authority granted by accountable representatives.

Trust and independence must be earned by evident competence and institutional restraint. Yet central banks, not obviously competent to target inflation with interest rates; floundering to stop financial crisis by means other than wanton bailouts; and still not addressing obvious risks lying ahead; now want to be trusted to determine and implement their own climate change policy? (And next, likely, taking on inequality and social justice?)

We don’t want the agency that delivers drinking water to make a list of socially and environmentally favored businesses and start turning off the water to disfavored companies. Nor should central banks. They should provide liquidity, period.

But a popular movement wants all institutions of society to jump into the social and political goals of the moment, regardless of boring legalities. Those constraints, of course, are essential for a functioning democratic society, for functioning independent technocratic institutions, and incidentally for making durable progress on those same important social and political goals.

It’s Not About Risk

The European Central Bank and other institutions are not just embarking on climate policy in general. They are embarking on the enforcement of one particular set of climate policies—policies to force banks and private companies to defund fossil fuel industries, even while alternatives are not available at scale, and to provide subsidized funding to an ill-defined set of “green” projects.

Let me quote from ECB executive board member Isabel Schnabel’s recent speech. I don’t mean to pick on her, but she expresses the climate agenda very well, and her speech bears the ECB imprimatur. She recommends that

[f]irst, as prudential supervisor, we have an obligation to protect the safety and soundness of the banking sector. This includes making sure that banks properly assess the risks from carbon-intensive exposures. . . .

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.

That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.)

Next, we contemplate a pervasive regime essentially of shame, boycott, divest, and sanction

[to] link the eligibility of securities . . . as collateral in our refinancing operations to the disclosure regime of the issuing firms.

We know where “disclosure” leads. Now all companies that issue debt will be pressured to cut off disparaged investments and make whatever “green” investments the ECB is blessing.

Last, the ECB is urged to print money directly to fund green projects:

We should also consider reassessing the benchmark allocation of our private asset purchase programs. In the presence of market failures . . . the market by itself is not achieving efficient outcomes.

Now you may say, “Climate is a crisis. Central banks must pitch in and help the cause. They should just tell banks to stop lending to the evil fossil fuel companies, and print money and hand it out to worthy green projects.”

But central banks are not allowed to do this, and for very good reasons. A central bank in a democracy is not an all-purpose do-good agency, with authority to subsidize what it decides to be worthy, defund what it dislikes, and force banks and companies to do the same. A central bank, whose leaders do not regularly face voters, lives by an iron contract: freedom and independence so long as it stays within its limited and mandated powers.

The ECB in particular lives by a particularly delineated and limited mandate. For very good reasons, the ECB was not set up to decide which industries or regions need subsidizing and which should be scaled back, to direct bank investment across Europe, to set the price of bonds, or to print money to subsidize direct lending. These are intensely political acts. In a democracy, only elected representatives can take or commission such intensely political activities. If I take out the words “green,” the EU member states, and EU voters, would properly react with shock and outrage at this proposal. If the ECB bought different countries’ bonds at different prices and in different quantities to reward those making greater progress on “green” policy implementation, there would likely be an outcry.

That’s why this movement goes through the convolutions of pretending that defunding fossil fuels and subsidizing green projects—however desirable—has something to do with systemic risk, which it patently does not.

That’s why one must pretend to diagnose “market failures” to justify buying bonds at too high prices. By what objective measure are green bonds “mispriced” and markets “failing”? Why only green bonds? The ECB does not scan all asset markets for “mispriced” securities to buy and sell after determining the “right” prices.

Here are two interpretations of the ECB’s proposal:

One: we looked evenhandedly at all the risks to the financial system, and the most important financial risk we came up with just happens to be climate.

Two: we want to get involved with climate policy. How can we shoehorn that desire into our limited mandate to pay attention to financial stability?

Who Gets the Green Light?

How should we judge the proposal? I think it’s pretty obvious that the latter interpretation is true—or at least that the vast majority of people reading the proposal will interpret it as such. Feeding this perception is the central omission of this speech: any concrete description of just how carbon sins will be measured.

At face value, “carbon emitting” does not mean just fossil fuel companies but cement manufacturers, aluminum producers, construction, agriculture, transport, and everything else. Will the carbon risk and defunding project really extend that far, in any sort of honest quantitative way? Or is “carbon emitting” just code for hounding the politically unpopular fossil fuel companies?

In the disclosure and bond buying project, who will decide what is a green project? Already, cost-benefit analysis—euros spent per ton of carbon, per degrees of temperature reduced, per euros of GDP increased—is lacking. By what process will the ECB avoid past follies such as switchgrass biofuel, corn ethanol, and high-speed trains to nowhere? How will it allow politically unpopular projects such as nuclear power, carbon capture, natural gas via fracking, residential zoning reform, and geoengineering ventures—which all, undeniably, scientifically, lower carbon and global temperatures—as well as adaptation projects that undeniably, scientifically, lower the impact on GDP? Well, clearly it won’t. The ECB is embarking on one specific kind of green policy, popular at the cocktail parties at Davos, but having little to do with cost-benefit analysis or science of climate policy.

If the ECB crosses this second Rubicon—buying sovereign and corporate debt was the first—be ready for more. The IMF is already pushing redistribution. The US Federal Reserve, though it has so far stayed away from climate policy, is rushing into “inclusive” employment and racial justice. There are many problems in the world. Once you start trying to shape climate policy, and so obviously break all the rules to do it, how can you resist the clamor to defund, disclose, and subsidize the rest? How will you resist demands to take up regional development, prop up dying industries, subsidize politicians’ pet projects, and all the other sins that the ECB is explicitly enjoined from committing?

A central bank that so blatantly breaks its mandates must lose its independence, its authority, and people’s trust in its objectivity and technical competence to fight inflation and deflation, regulate banks, and stop financial crises.

In sum, where is the analysis for this program? I challenge the ECB to calculate how many degrees this bond buying plan would lower global temperatures, and how much it would raise GDP by the year 2100, in any transparent, verifiable, and credible way. Never mind the costs for now: where are the benefits?

And how would the ECB resist political pressure to subsidize all sorts of boondoggles? If the central bank does not have and disclose neutral technical competence at making this sort of calculation, the project will be perceived as simply made-up numbers to advance a political cause. All of the central bank’s activities will then be tainted by association.

This will end badly. Not because these policies are wrong, but because they are intensely political, and they make a mockery of the central bank’s limited mandates. If this continues, the next ECB presidential appointment will be all about climate policy: who gets the subsidized green lending, who is defunded, what the next set of causes is to be, and not interest rates and financial stability. Board appointments will become champions for each country’s desired subsidies. Countries and industries that lose out will object. This is exactly the sort of institutional aggrandizement that prompted Brexit.

If the ECB crosses this second Rubicon—buying sovereign and corporate debt was the first—be ready for more. The IMF is already pushing redistribution. The US Federal Reserve, though it has so far stayed away from climate policy, is rushing into “inclusive” employment and racial justice. There are many problems in the world. Once you start trying to shape climate policy, and so obviously break all the rules to do it, how can you resist the clamor to defund, disclose, and subsidize the rest? How will you resist demands to take up regional development, prop up dying industries, subsidize politicians’ pet projects, and all the other sins that the ECB is explicitly enjoined from committing?

A central bank that so blatantly breaks its mandates must lose its independence, its authority, and people’s trust in its objectivity and technical competence to fight inflation and deflation, regulate banks, and stop financial crises.

The full account is here.

  1. November 26, 2020 9:54 pm

    R4 Science show did 2 climate items
    Satellite to better measure sea level rise, then an fluff item onpossible battery improvements, nothing concrete.
    Then into the trailer for the RI Christmas Lectures came on
    .. guess who’s doing them ?
    Yep, Mark Carney the Bank of England Greendream fanatic

    “From Climate Crisis to Real Prosperity – from 18 to 16 November.”
    The series is introduced by Anita Anand
    From Moral to Market Sentiments Wed 2 Dec, 0900-0945
    From Credit Crisis to Resilience Wed 9 Dec, 0900-0945
    From Covid Crisis to Renaissance Wed16 Dec, 0900-0945
    From Climate Crisis to Real Prosperity* Wed 23Dec, 0900-0945

    Strange way to spell poverty

    • November 26, 2020 10:22 pm

      In this final lecture, Dr Carney turns his attention to climate change, arguing that the roots of our environmental emergency lie in a deeper crisis of values.
      He suggests how we can create an ecosystem in which society’s values broaden the market’s conceptions of value.
      In this way, individual creativity and market dynamism can be channelled to achieve broader social goals including inclusive growth and environmental sustainability.

      • Phoenix44 permalink
        November 27, 2020 8:29 am

        It’s extraordinary that a person who has held such senior positions in a free market economy is so utterly ignorant of how it works. The market values what we value. That’s why markets work and how they come into being. If we value trees, the market will produce trees. If we value reliable electricity and the government doesn’t get in the way, the market will provide reliable electricity. What Carney and the others mean is we should all value what he values. It is arrogant narcissism which destroys intelligent thinking.

    • Gerry, England permalink
      November 27, 2020 10:18 am

      Had me going at first but you have made an error. Carney is doing the Reith lectures which these days is a series of talks that insults the memory of Lord Reith. This is not the Royal Institution Christmas lectures which can be some excellent viewing given they are aimed at children and so include lots of experiments and demonstrations.

  2. November 26, 2020 10:08 pm

    Now something just came up Thurrock Council got caught out paying £5m to a sola spiv for £145m Green Bonds based on solar The Times
    Turns out they have borrowed £815m for green investments. Ridiculous cos their job is to collect the bins, not be speculators.
    Their call back is that we made £65m over 2 years
    But if you understand the biz, later on panels will break etc. and the money making potential will fall.

    In May the FT did a report saying other councils have done the same ..All in all billions have been borrowed

  3. Ian Magness permalink
    November 26, 2020 10:12 pm

    An excellent article covering a topic that many outside of the financial world may not be aware of. It’s all so insidious. Western banks in general are already infected and are proving this with their heavy sponsoring of “green finance”. The ultimate conclusion (aside from nauseating compliance costs for all) is the defunding of any corporate activity that doesn’t paint itself green. This will simply play into the hands of the likes of China and Russia and parts of the Middle East (who I’m sure cannot believe their luck) either by exporting jobs to these “climate disinterested” territories or simply by moving banking and lending services away from western banks to those in the aforementioned countries. If anyone doesn’t believe that, see the online campaign against HSBC right now. It’ll take a brave bank board to resist completely.
    I only take minor issue with one aspect of the article as follows. The author writes: “The question is whether the European Central Bank (ECB), other central banks, or international institutions such as …. should appoint themselves to take on climate policy—or other important social, environmental, or political causes—without a clear mandate to do so from politically accountable leaders.” It seems to me that in the UK now, and in the EU for decades, we no longer have “politically accountable leaders”. We can’t trust them to represent us. How about only believing in the authority of a country to act if something as major as spending countless billions of £/$/€ have been put to public vote as Brexit was? Hopelessly idealistic I will accept who can trust governments any more?

    • bobn permalink
      November 26, 2020 11:31 pm

      Yep. Australia has folded. ANZ Bank has announced its going wonky; will be interesting to see shareholder reaction, probably have to wait for AGM.

  4. November 26, 2020 10:18 pm

    Boris’s 10 point Green Plan is very Stalinist
    .. It’s the markets job to find winners, it’s not the governments job to PICK winners.
    So far Nottingham, Bristol and Portsmouth City Council-owned Energy corps have all gone bust.

  5. November 26, 2020 10:25 pm

    Paul, you do a fantastic job in bringing this material to a wider audience. Thanks, you are a breath of fresh air.

  6. Nordisch geo-climber permalink
    November 26, 2020 11:25 pm

    Paul 13 million page hits.
    Nominate you for a knighthood.
    Many thanks for all your effort.

  7. alexei permalink
    November 27, 2020 1:26 am

    The “Greening” of the banks is in line with The WEF/Great Reset and their plan to abolish cash, greatly favored by Mr Carney.

    • ThinkingScientist permalink
      November 27, 2020 7:53 am

      Or else!

  8. November 27, 2020 1:30 am


  9. markl permalink
    November 27, 2020 2:43 am

    Ian Magness said: …. It’s all so insidious….
    +1 The Marxists are creeping up on our lives in such small increments we failed to see them coming. The insertion of CC into every aspect of society is the Trojan Horse.

    • ThinkingScientist permalink
      November 27, 2020 7:55 am

      No so sure that economically you are looking at Marxists as opposed to National Socialism.

      The tenet does not seem to be owning the means of production, more that the state dictates what you sell and to whom, with the state becoming the main customer (wind farms, solar farms etc).

      • Penda100 permalink
        November 27, 2020 9:18 am

        I agree that what is being discussed is far too close the the economic policies of the Nazis (obviously without the racial element) not to give cause for concern. Having said that, the vilification of Deniers has some worrying similarities …….

      • ThinkingScientist permalink
        November 27, 2020 12:36 pm

        Defund the Police in America and Anitifa = Brownshirts?

        When do XR get militant and become Brownshirts?

  10. tom0mason permalink
    November 27, 2020 7:39 am

    Central Bankers fail to keep peoples’ money, pensions, and wealth safe, fail to proceed with caution, prefer to gamble your future on Central Banks becoming more powerful.

    Next up,
    Mission creep by the NHS and the Lancet
    Why tend the sick when there’s a planet to save?

  11. JimW permalink
    November 27, 2020 7:50 am

    Good talk, but about 5 years too late. Under Carney’s chairmanship, the sub-committee at BIS has already created the framework for all CBs, commercial banks and insurance companies to use the risk criteria for green investments. Its already hardwired into their decision making processes.
    This is the real probelem, which I think we are seeing again with how the covid situation is being ‘managed’. Many important issues are being determined by international ‘management’ well away from the elected politicians and the media ( who deliberately turn a blind eye in any case). There already is an technological , financial management at work laying the limits to which our economies and societies are allowed to operate within.
    Its increasingly very rare that countries are allowed to do anything outside those parameters. Now Trump is gone and Brexit is reduced to manageable proportions, the ‘western’ industrialised world is more or less controlled. China and Russia ( and to a certain extent India) are outside this , but its clear that accomodations are in place.
    This is not Marxist or ‘communist’ its very clearly techno-fascism. The new rulers are corporations working with States.

    • ThinkingScientist permalink
      November 27, 2020 7:58 am

      +1 – it is the economic model of National Socialism, not communism.

    • M E permalink
      November 27, 2020 9:48 pm

      Trump isn’t gone yet. The newsmedia are pushing a false view of the Electoral Process.
      He is President until the inauguration in January.
      They are anxious for him to concede and not to have people focus on their interference.

      Frightened, I think.

      Look at the owners of the news media and you will find personal enemies of Mr Trump abound and the very methods we have in communicating are owned by his sworn enemies.
      It won’t be long before the right to differ is eroded .
      Even in New Zealand it is not the done thing to differ.

  12. ThinkingScientist permalink
    November 27, 2020 8:09 am

    So we have Google, Facebook, Twitter and other large tech companies promoting their left of centre political views, downgrading conservative views, all with a free pass because of Section 230 protection.

    Meanwhile banks and corporations are being pressured to “go green” and policies are being enacted to starve fossil fuel companies of liquidity. These policies will put pressure on the most fundamental raw material – the cost of input energy to manufacturing, processing, living.

    I recall in the fuel crisis in 1999 some politician saying that 5p rise in fuel prices reduced UK growth by 1%. To which my question then was – why not cut fuel duty by 30p and see what happens to economy? How much cheaper would everything be in the UK if fuel was priced like the USA?

    And how much less cost for people if all our heating and electricity was from fossil fuels – coal and gas. Energy markets are so distorted now, but current Western democracy policies are going to make it much worse. The underlying intent seems to be to make the oil price increase rapidly which then justifies the cost of renewables. That was the modelling justifying renewables some 10-15 years ago I recall – the price of gas was going to keep going up so renewables are competitive. That was before shale gas and the USA going from being a net importer to exporter of gas in just a decade.

    The cost of the lights going out never seems to occur to the idiots in power.

  13. ThinkingScientist permalink
    November 27, 2020 8:18 am

    08:05 am on

    In the woke world of “clean energy”:

    Criminal Biomass 8.0% (maxed out as Drax sucks in the subsidies)
    Wind 2.3%
    Solar 0.0%
    Hydro 2.7%

    In the real world of reliable cheap energy:

    Gas 60.0%
    Coal 7.0% (!)
    OCGT (gas) 1.1%
    Nuclear 15.2%

    So fossil fuels currently supplying 68% + nuclear 15% = 83%.

    If the criminal Biomass was outlawed, solar would have to be expanded around 30x to have any chance of supplying filling the fossil fuel shoes. And the battery would have to….quite big.

    The only answer if you believe in climate change is to follow France and go 70 – 80% nuclear. But you still need load following capability.

    • ThinkingScientist permalink
      November 27, 2020 8:27 am

      PS – even France is burning fossil fuels to keep up – Gas is maxed out at 12.7%, Hydro is maxed out and they are even burning coal and oil – total French fossil fuels currently 15.6%

    • Phoenix44 permalink
      November 27, 2020 8:34 am

      One cold morning quite soon 10% of the country is going to wake up and find it doesn’t have any electricity and it’s pretty miserable. It really ought to be the 10’% who think they only get renewable electricity but it probably won’t be.

    • MrGrimNasty permalink
      November 27, 2020 9:16 am

      For several hours overnight, the last 2 nights, wind has actually dropped out completely, well enough not to register on the graph.

      This morning Belgium and France inter-connectors are giving us nothing, they are keeping all the power they can generate. Quelle surprise!

      Coal is supplying nearly 3GW.

  14. Phoenix44 permalink
    November 27, 2020 8:25 am

    All institutions have been corrupted, from parliament with the Peoples Assembly through the BoE to the NHS. All now have the Greens view of climate policies as one of their central planks of responsibility. Aside from anything else we now spend billions on pointless jobs all telling us the same thing, over and over again.

  15. John Peter permalink
    November 27, 2020 9:21 am

    Wait for the power cuts and the reaction of the long suffering people. Won’t be pretty. The press might even then grasp the nettle and point the finger at the perpetrators.

    • ThinkingScientist permalink
      November 27, 2020 12:39 pm

      I agree and I think the public backlash will be very severe.

      But in a democracy it should never get to the point of the lights going out before anyone listens to reason. An example of when this rot began is with the BBC banning climate sceptic views at their secret conference with greens & NGOs in 2006. Direct contradiction of their Charter and basically taking sides with a group driven by emotion rather than reason.

      Its going to get worse before it gets better.

  16. November 27, 2020 12:35 pm

    Note to overlook that Carney and cronies jumped on the climate bandwagon instead preparing for a future pandemic, which happened this year catching them by surprise.

    “The insurance execs picked up the macroprudential warnings. The replacement of pandemic risks with climate change as a threat to the global financial and economic system was highlighted this week by Roger Pielke Jr. at the University of Colorado. In 2008, the No. 1 risk cited by insurance executives was a pandemic, described as “a new highly infectious and fatal disease spreads through the human population.” In 2019, the top risk was identified as “global temperature change.” Pandemic was not even one of the top-10 insurance risks.”

    IOW those responsible for global financial resilience focused on a fake crisis, leaving the world vulnerable to Covid19. Of course now, they conflate the two to cover their ineptitude.

    • November 27, 2020 12:40 pm

      This is not to assert that Covid19 is “a highly infectious and fatal disease”, though it has been deemed so by social media and 24/7 cable news, and thus wreaked economic havoc without any defenses from IMF or other such institutions.

    • November 27, 2020 12:43 pm

      At the turn of the 2020 New Year, Carney appeared on BBC television calling for “action on financing” from banks against fossil investments. One day later, the Communist government in China informed the World Health Organization of pneumonia cases in Wuhan City, Hubei province, with unknown cause. Carney’s get-out-of oil call caused alarm within Canada’s fossil fuel industry. At the time, oil was trading at US$55 a barrel.

      On Tuesday, thanks in part to the pandemic Carney and the macroprudes failed to plan for, West Texas crude continued to languish at just above US$20.

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