arezki8_KHALED DESOUKIAFP via Getty Images_egyptoilgasmoney Khaled Desouki/AFP via Getty Images

Fossil-Fuel Exporters Must Rethink Monetary Policy

In the face of the challenge posed by climate change, the focus of monetary policy often seems very short term. Central bankers must break this “curse of horizons” and take decisive steps to address fossil-fuel-related risks.

WASHINGTON, DC – In a 2015 speech, Mark Carney, the outgoing governor of the Bank of England, sparked a debate about whether monetary policymakers should look beyond the horizon of the business and credit cycles to ensure financial stability in light of the risks posed by climate change. More recently, European Central Bank President Christine Lagarde has said that she wants the ECB to tackle climate change, in addition to its traditional price-stability remit.

The climate threats to financial stability that central bankers worry about could arise not only from increasingly frequent and severe natural disasters, but also from the shift away from fossil fuels as a source of energy. That transition ultimately would turn reserves of oil, natural gas, and coal into stranded assets, jeopardizing the financial health of corporations, insurers, and other financial institutions that are exposed to fossil fuels.

The overall exposure of advanced economies such as the United Kingdom or those of the European Union to fossil fuels may appear to be relatively small. Nonetheless, we should not underestimate the systemic risk posed by stranded assets – after all, the 2008 global financial crisis was triggered by developments in the relatively small subprime mortgage market in the United States. And, for fossil-fuel exporters, stranded-asset risks are undeniably larger. The collapse in oil prices that started in June 2014 provided a recent stark reminder of the risks posed by excessive dependence on fossil fuels.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

or

Register for FREE to access two premium articles per month.

Register

https://prosyn.org/q5Ei2Jq