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The Dangerous Allure of Green Central Banking

Europe's central bankers have been insulated from political influence to pursue the very narrow mandate of price stability. Greening monetary policy might look attractive at first glance, but it represents a departure that is incompatible with their independence.

BRUSSELS – Central bankers and financial supervisors around the world are increasingly focusing on an issue that is normally outside their remit: climate change. Both the International Monetary Fund and the Bank for International Settlements (the central bank for central banks) have published reports on climate risk recently. And the European Central Bank is seemingly getting ready to target the so-called green spread, or the difference in financing conditions for low-carbon and high-carbon activities.

There are essentially two reasons given for mobilizing central bankers to focus on climate change: risks to financial stability and market failures. But the economic and political logic behind them is weak, especially in Europe.

Although climate change presents a huge risk for everyone, it develops slowly over decades as greenhouse gases (GHGs) accumulate in the atmosphere. Governmental mitigation measures are also likely to make many higher-carbon “brown” business models uneconomic in the long run.