How green is my central bank

Synopsis: Green climate and other bonds, and fixed-income assets, cannot guarantee carbon neutrality.


The Bank of Finland has announced that its investment portfolio will be carbon-neutral by 2050. Also, many western central banks are making similar announcements.

However, the author of this article states that resorting to green climate financing by central bank (RBI) will not solve the problem of climate change.

Besides, he also points out that ensuring carbon neutral investment through green financing is an uphill task.

Why green climate financing by central bank is not the solution?

Firstly, green financing completely misses basic principles of government finance. Government revenues are not directly linked to expenditures. Governments do not spend to maximize tax revenue. This is equally true of debt-financed government spending. Even if such debt-financed spending is only used for capital expenditure, the portfolio of capital spending cannot be judged according to its carbon impact, since a large chunk of such investment is financial investment. Nor do they generate revenues solely to spend them on acquiring goods and services, like households do.

Secondly, a large chunk of government expenditures are transfers, which seek to influence the allocation and distribution of resources in an economy. For eg: Unemployment benefit used to buy fossil fuels is bad for carbon, but that does not make it carbon-positive.

Thirdly, even if domestic debt is used to finance a high-carbon investment, there is no way any central bank can refuse to issue such debt as – i). It is not part of the mandate of a central bank to tell the government how to spend its money, ii). Specific sovereign bonds cannot be reserved to a specific investment activity, as these are issued to finance a fiscal deficit and are therefore neutral.

Fourthly, the reasons why central banks acquire foreign debt have absolutely nothing to do with the purpose of issuance.

Finally, Green climate and other bonds, and fixed-income assets do offer an explicit and potential guarantee of carbon neutrality. However, there are two problems with this: i). The first is that it takes away from the sovereign’s absolute power to receive resources (whether tax or debt) ii). The second is that green financing does not guarantee carbon neutral green procurement or utilization. For instance, if a green bond is used to finance a railway project but the steel and electricity used to produce and run the railway are dirty, then can it be said to be carbon-neutral?

What is the way forward?

The problem, as the world has carbonized, is that a minority of people have been consuming too much and a majority too little. Hence, unless the negative impacts of the consumption of the affluent are recognized and discouraged, the climate change issue will not be effectively addressed.

Source: This post is based on the article “How green is my central bank” published in Business standard on 17th Sep 2021.

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