Saturday, 4 May 2019

60 economists claim central banks should do more to combat climate change.

That’s in a letter from the 60 to the Financial Times published a few months ago. The letter is entitled “BoE itself must now take action on climate change.”

Now I’m all for dealing with global warming, but this isn't a good way to do it.

First, the letter argues that the BoE should take account of the climate change risks inherent to some of the bonds the BoE buys. Well the first problem with that idea is that bond buying by central banks, i.e. QE, was seen from the outset as being a temporary measure, and presumably that is what it will turn out to be. That hardly makes it a brilliant idea for combating climate change.

Among the reasons for it being a temporary measure is that it is not the job of central banks, or of government in general, to take commercial risks.

Next, the letter suggests that insurance companies (whose bonds central banks have bought) have not taken climate change risks into account to a sufficient extent.  Well the answer to that is that climate change, assuming the climate change experts are right, is coming relatively slowly. For example we all know that sea levels are rising: but not at meter per year! The rise is more like a millimeter a year. Plus (surprise surprise) insurance companies are well aware of the flooding risks that involves and have already denied insurance for thousands of houses because of that.

Then in the penultimate paragraph, the letter claims “The BoE’s collateral framework and asset purchases are extremely powerful and reverberate throughout the rest of the financial sector..”

Well frankly I doubt it. That is, on the above assumption that QE will turn out to be temporary, the ultimate risk in relation to bonds remains with the private sector: that is, shifting the risk to the public sector, which is what happens when a central bank buys bonds, is only a temporary shift. To that extent, the fact of a central bank temporarily buying bonds issued by corporation  X will have little effect on the price of those bonds in the long run, and thus equally little effect on the costs of funding that corporation.

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