The pandemic crisis has exacerbated existing inequalities and has been an abject lesson in what happens when nations don’t prepare in advance for catastrophe. It has also led many to draw the comparison between this health crisis and the ongoing climate crisis — and the growing and urgent need to tackle climate change now before it spirals out of control.
The U.S., which continues to lead the world in COVID-19 infections, has taken the opposite approach — rolling back environmental protections, including many during the pandemic, giving tax breaks to polluters and withdrawing from the Paris climate accord. Even the ostensibly politically independent Federal Reserve is over-investing in fossil fuels in one of its economic response programs. By contrast, the European Union (EU) is taking these dual crises seriously, combining its pandemic response with work to also blunt the coming climate crisis.
In September, the European Commission (EC) — the governing body of the European Union — announced a massive new green bond program. As a part of its ongoing pandemic recovery, this coming January the EC will sell bonds in order to raise €750 billion (or $857 billion USD). This EU Recovery Fund will distribute its funds among the countries and sectors in the EU most impacted by the coronavirus pandemic. About 30 percent (€225 billion) of the bonds they plan to sell will be sustainable green bonds. These bonds will back projects related to tackling climate change. This will not only make the EU the largest issuer of “green bonds,” it will effectively double the size of the international market for sustainable financial products — as the total of all the green securities sold globally last year was $274.2 billion according to Bloomberg.
As highlighted by the NGO Reclaim Finance, what is considered a “green bond” can vary significantly, and a recent report from Bank for International Settlements found that green bond projects haven’t necessarily translated into comparatively low or falling carbon emissions. In order to clarify what it considers “green,” the EU developed a green taxonomy that acts as a screening criteria for economic activities, looking at what can make a substantial contribution to climate change mitigation or adaptation while avoiding significant harm to the environment.
Including green bonds in the EU Recovery Fund is hardly the first ambitious climate initiative the EU has pursued. The European Green Deal is a 10-year, 1 trillion euro proposal that aims to make the EU climate-neutral in 2050. While ambitious in many respects, the Green Deal has faced criticism from progressives for its support for natural gas and its failure to address subsidies for coal, with others criticizing it for being an exercise in reshuffling money that will only generate 7.5 billion euros in new budget commitments over seven years. The European Commission itself has estimated that Europe would need 260 billion euros annually in order to achieve its 2030 climate and energy targets; the Green Deal only allocates 100 billion euros a year. But the scale and scope of its effort remains far more than what the U.S. has pursued.
Europe may not limit climate interventions to the realm of fiscal policy — it looks like the European Central Bank (ECB) is open to using monetary policy to fight climate change as well. Over the summer, ECB President Christine Lagarde said she would consider “every avenue available” to combat climate change. On October 14, Lagarde appeared to take some steps in that direction, saying the ECB may consider factoring in climate risk when deciding which bonds to buy in support of the economy. This is in stark contrast to the U.S. approach, where the Fed has bought a disproportionate amount of bonds from fossil fuel companies, including many driving environmental racism.
One of the principles some central banks have adhered to when they take action to boost financial markets is that they should not be picking winners and losers in particular industries, but instead should be “market neutral.” The U.S.’s central bank, the Federal Reserve, has faced criticism not just for failing to be market neutral, but for being more heavily invested in bonds from fossil fuel companies than the rest of the market is, as recently noted in a report from the House Select Subcommittee on the Coronavirus Crisis.
One of the economic rescue programs the Fed has launched during the pandemic is one that buys the corporate debt of companies. But more than 10 percent of the Fed’s bond purchases are fossil fuel companies, even though fossil fuel firms only employ 2 percent of all workers employed by firms in the S&P 1500 stock market index. This is in spite of the terrible financial track record oil and gas companies have, and their history of polluting communities of color across the U.S., such as Marathon Petroleum in Detroit.
European central bankers, meanwhile, are considering moving in the opposite, future-forward direction — by asking whether central banks should pursue market neutrality at all, given their responsibility to boost green industries that will help ensure a livable world in the face of accelerating climate change. In a talk to the United Nations Environment Programme Finance Initiative, Lagarde pointed out that financial markets have “not priced in the massive risk that is out there” on climate change, and as a result, asked if central banks should change their approach. Lagarde said central banks need to think about the “excessive risks” they may be taking by relying on the same markets that have failed to acknowledge the long-term costs of climate change. The upshot of Lagarde’s comments is that the European Central Bank may consider factoring in climate risk when it decides to purchase for any future stimulus.
As the frequency of wildfires, disasters and extreme weather increases as the climate crisis accelerates, so too do the financial risks governments and private businesses alike face — disaster cleanup is costly. And as Graham Steele of the Stanford Business School and Gregg Gelzinis of the Center for American Progress have argued, climate change is a threat to global financial stability. These risks should be priced into the costs of all financial securities, from insurance contracts to stocks in oil companies like Exxon — but they haven’t been.
This failure of the market to account for these risks was also noted in a September 28 speech by European Central Bank Executive Board member Isabel Schnabel. Schnabel, like Lagarde, noted that being market neutral “may not be the appropriate benchmark” because markets aren’t factoring in the cost of climate change. And she argued that because “policies to mitigate the adverse and partly irreversible effects of climate change are not moving fast enough” there needs to be collective action both by governments and by central banks.
The Fed has shown no such urgency. And the Trump administration, which has been nakedly working to boost oil and gas firms while gutting environmental protections, has no interest in a green bonds program.
But should Joe Biden win in November, we will likely see a shift in priorities: Biden has pledged to invest $2 trillion in green infrastructure and energy. Market analysts have noted that this significant funding could come through green bonds. It could also be achieved through a coordinated national investment in sustainable projects. One such proposal by Cornell law Professor Saule Omarova is for a new agency called the National Investment Authority that could jumpstart a green transition by creating a new, public investment manager with a social mission. The U.S. should look to Europe for inspiration on the scale of the EU Green Deal, while being responsive to and addressing the criticisms from the left that the EU deal has faced.
But the Fed, independent of Congress and the president, could act now. And the Fed has shown some willingness to explore how it can do more to tackle systemic economic problems. Three regional Federal Reserve Banks are currently hosting a seven-part conference series discussing the economic implications of structural racism in the U.S. and ways to address them. At a minimum, the Fed should consider ways that its purchases of $315 million in bonds of fossil fuel firms, including those with a track record of environmental racism, are exacerbating the problem. But were Fed Chair Jerome Powell willing to act in accordance with his past statement that he will “act to ensure that the financial system is resilient and robust against the risks of climate change,” he would follow the lead of the European Central Bank. It’s time for the Fed to join the European Central Bank in acknowledging the inherent financial risks that climate change brings, and to ensure that the securities the Fed buys to boost the economy are done with climate risk in mind.