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Central Banks Should Act on Climate Change, Former Official Says

William Edwards

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Central banks should pay more attention to climate change and income inequality, Patrick Honohan, a former governor of the Central Bank of Ireland, argued Tuesday in a new paper from the Peterson Institute for International Economics.

“If central banks applied, to their own bond purchases, the new approach to climate-related financial risk that they are pressing on private bankers, they would reduce their purchases of bonds issued by carbon-intensive firms,” wrote Honohan, who is now a nonresident senior fellow at the Washington think tank.

His remarks contrast with a warning earlier on Tuesday from Bundesbank President Jens Weidmann that giving preference to green bonds when conducting asset purchases would overburden central banks and could eventually endanger their independence.

Honohan acknowledged that central bankers have traditionally been reluctant to focus on inequality and climate change when pursuing monetary policy goals. “This now should be corrected, through both deeper analysis of the channels of effect and consideration of side effects in the choice of policy mixes,” he wrote.

Incoming European Central Bank President Christine Lagarde has also hinted that she may want to harness the institution’s asset purchase program to fight climate change.

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