Opinion: How the Fed Could Give Green Light to Environmentally Sustainable Investments

BOSTON (Project Syndicate) —The Federal Reserve has made a series of weather-related announcements in recent months, joined the Network to Green the Financial System in December, and then established a new Climate Oversight Committee in February. However, while these are important first steps, the Fed should do more to address climate change, which in turn can help it fulfill its mandate.

Although President Joe Biden has made clear that climate considerations will influence all of his administration’s fiscal decision-making, this does not free up the central bank. But the Fed, concerned about its independence, is wary of deploying the unconventional tools needed to bring monetary policymaking to the same page.

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Now that the Federal Reserve has begun to speak more openly about climate change, it should take a hard look at the tools it already has available to make a dent in the problem. What you will find is that some green monetary policies serve both the environment and the economy. ”

The Fed has already gone far beyond manipulating the overnight bank loan rate (the benchmark for borrowers and savers throughout the economy) and into unconventional waters, such as when it began buying assets in response to the COVID-19 pandemic. He says he doesn’t want to pick winners and losers, but he already does: Anyone with assets bought by the central bank ends up being a winner. Opinion: Central banks don’t have to pick winners and losers to fight climate change Legal constraints True, even if the Fed were willing to fully incorporate climate change into its monetary policy, its actions would still be legally restricted. The central bank can buy US government bonds directly only in open market operations or through quantitative easing (QE) programs. To support a particular asset class, such as green investments, directly, you would have to receive authorization from the Treasury Department to invoke Section 13.3 of the Federal Reserve Act. News: The government can leverage private spending to fight climate change, Yellen says. But the Fed can get around these limitations by encouraging private banks to channel their loans in a certain direction. The Fed charges banks for direct loans through its discount window, and this discount rate is currently set above the federal funds rate. As a result, any bank that borrows through this window must pay a premium, raising suspicions that it would only do so if it were in trouble. But this does not have to be the case. In the 1970s and 1980s, the discount rate was below the federal funds rate, and the Fed could effectively subsidize borrowing banks through the discount window by reducing the discount rate deeply. in negative territory. So, to encourage green investing, the Fed could stipulate that funds borrowed in the discount window at a prime rate must be used for a climate-aligned purpose. And by maintaining a positive bank credit rate, you could ensure that the introduction of negative rates does not penalize savers and banks. More on the Fed: The Fed’s quest for disclosure on climate change is “imperfect” but developing, says Brainard. Targeted Loans There is already a precedent for this type of targeted loan. Following the global financial crisis, the Bank of England launched its Loan Financing Program to encourage property investment and then re-implemented this mechanism for targeted loans to small and medium-sized businesses during the pandemic. Similarly, in April 2020, the European Central Bank introduced specific longer-term refinancing operations in which banks that generated new loans to the real economy borrowed at an interest rate lower than the main deposit rate. And in October, the Bank of Israel introduced its own separate interest rate for specific loans. But how can the Fed identify “green investments” when that concept remains so loosely defined? For starters, you should offer specific loans for two asset classes that you already support: real estate (through securities purchases through QE) and automobiles (through loans to a special purpose vehicle that purchases auto loans through the Loan Service). term asset-backed securities). Rachel Koning Beals: Kerry says Biden is ready to issue an executive order to force banks and investors to disclose climate exposure.According to the Environmental Protection Agency, residential and commercial real estate accounts for about one-third of greenhouse gas emissions. US greenhouse effect (GHG) and transportation accounts for about 28%. By encouraging the greening of these assets, the Fed could significantly affect the United States’ contribution to mitigating climate change. Also, the Fed doesn’t have to reinvent the wheel to determine which properties or cars qualify as green. Both Fannie Mae and Freddie Mac offer green loans and green certifications for single and multi-family homes. The Fed and the Federal Housing Finance Agency, Fannie and Freddie’s regulator, could come together to determine the best standards to use, and the FHFA could become the green property appraiser. In automobiles, the Fed could follow the standards set by the voluntary emissions agreement between the California Air Resources Board and five major automakers (Ford F, -1.37%, Honda HMC, + 0.27%, BMW BMW, -0.69%, Volkswagen VOW, -2.83%, and Volvo VOLV.B, + 0.82%), which requires an annual reduction of 3.7% in greenhouse gas emissions from New passenger cars Subsidize borrowers, not banks Beyond adopting clear rules, the Fed must also ensure that banks do not pocket the entire subsidy. For new loans, you should require that a certain minimum percentage of the grant be passed on to the end user. And for existing loans that meet green requirements, you should offer a price adjustment for banks to qualify for the negative rate. Targeted loans that use the discount rate are not only a powerful measure to address climate change; It would also strengthen the Fed’s toolkit more generally. By offering specific borrowers a negative rate while maintaining a positive federal funds rate, the central bank would benefit borrowers and savers at the same time. This would provide an unequivocal stimulus to the economy after an unprecedented decline in activity, and after an even longer period during which the Fed has struggled to meet its mandate on inflation. Targeted green lending would allow the Fed to do its job while tackling one of the biggest crises of our time. Megan Greene, a senior fellow at Harvard University’s John F. Kennedy School of Government, is a member of the Regenerative Crisis Response Committee. This comment was posted with permission from Project Syndicate: How the Fed Could Go Green Faster More on Green Investing Alicia Munnell: Can Investors Solve the Climate Change Problem? 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