# Finance, Money and Climate Change with Markus Brunnermeier  | Markus Academy | Ep. 77

https://www.youtube.com/watch?v=KgaB-fReHBM

[00:03] so welcome back everybody to another webinar organized by princeton.
[00:07] uh for you for world for the whole world.
[00:10] today i will actually talk my own on finance money and climate change.
[00:15] it's a policy paper i wrote for the economic policy journal together with chopin londo.
[00:21] and i would like to outline you know some of these challenges some of the policy measures the policy changes which are connected to climate change and what finance and monetary policy can do about it.
[00:33] and thanks for joining us it's a pleasure to have you with us again.
[00:37] so what the motivation essentially is there's a sense out there you know climate change is a very urgent problem and so we have all hands on deck have to work together in the same way so it can't be that only one type of policy is dealing with climate change and the other policies are not dealing with that.
[00:53] and part of it is green finance and another part of it is the greening of monetary policy and i would like to zoom in both of these elements a little bit further today and what are the
[01:03] challenges what are the trade-offs
[01:06] and what how to think about them so
[01:08] please submit your questions in the q a box
[01:10] and then i will try to address the questions as they come in most likely at the end
[01:16] in order to we have a q a session subsequently
[01:21] now you answered already some poll questions so let me just tell you the poll questions as well
[01:27] so what was the reaction to the poll question so the first question was is esg like the labeling of financial assets based on a rating an esg rating environment social governance structures
[01:40] this is an effective tool for climate change and actually what people said is and only in 39 percent that it's an effective tool and 61 percent no it's not an effective tool
[01:51] the second question i like to pose to you and have posts to you and you gave me an answer to is what is your should be the preferred option to incentivize pollution reduction should it be a beckovian tax should it be a tradable permit scheme or should it be some green
[02:05] finance and the answer was 39 percent.
[02:08] for pigouvian tax.
[02:09] 36.
[02:11] for credible pollution permits and only 25 percent for green finance.
[02:13] of course one doesn't exclude the other one uh so.
[02:16] but essentially uh that's uh you know the preference which one should be the most preferred one.
[02:25] and then the final question question was whether monetary policy should actually contribute to the climate change and the answer here is actually split 50 50.
[02:34] uh 50 said yes and 50 said no.
[02:38] so perhaps you will change your mind afterwards uh but it's a good guideline to have how people think about these questions in the beginning.
[02:47] now before i start i would like to start with some basic principles and what are the challenges for policy making more generally.
[02:53] if i to look at the policy functions allah richard muskraf a public finance hero i said that there's three functions of public policy one is allocation.
[03:05] allocation of resources and production capacity.
[03:07] another one is redistribution.
[03:11] so we distribute some wealth.
[03:13] and the third one is stability.
[03:15] price stability and financial stability.
[03:17] of course allocation has also some risk.
[03:19] allocation to it and how you allocate the risk will affect also the endorgency risk.
[03:24] so how much risk there is in total.
[03:26] so the allocation is not just on you know distributing the risk accordingly.
[03:30] but it also will affect how much risk there is in total.
[03:33] and that of course when there's a lot of endorphins risk including crisis risk.
[03:37] amplifications and so forth that has also implications for stability.
[03:39] so allocation and stability is of course connected.
[03:43] so it's redistribution but you can think of this as a basic three functions uh which we were taught in public finance uh based on richard matzkel's classification and of course the ability that's where central banks come into play very heavily as well.
[04:00] so these are the policy functions and the question is what are the policy instruments.
[04:02] so the next slide is about
[04:07] policy instruments and the the question is so if i want to bring all policy focused on climate change should there be specialized policy instruments focused and to do the greening or should there be a multi-purpose one and how should one evaluate that whether you know the cleaning of existing policies so i look at existing policies and should i make them all green i'll take a green component part of it and how should i evaluate that so the first one is the effectiveness in addressing the climate change so it might be very effective to make a monetary policy on other policies which objective is a different one like price stability um to also carry climate change considerations or it might not be effective and the other question is second criterium should be how much do you interfere with your original policy objective okay so the extreme should you know you could think of that like health care is one policy should healthcare have some cleaning component as well or not.
[05:08] but the consequences of course if you clean all policy instruments.
[05:12] so if you take also a cleaning component to that uh you diminish the accountability and you also might i will come back to this weakened independence if this some of the policies are outsourced some independent agencies like central banks uh you might have some elements of that.
[05:29] so these are the basic conceptual things and to have a background what are the functions what are the policy instruments and then there's also a challenge uh in terms of horizons what policies different policies have different horizons and uh that goes back to makani's speech saying the tragedy of horizons.
[05:47] so if you think about climate change climate change is a long-lasting thing so we have to act now and in order to fix that but it has some long-lasting implications on climate change.
[06:04] and so that's why but it has you know it's we're talking about decades the cumulative process the local shocks uh
[06:11] first you know there might be a lot of the shocks might be using chronic but we might also hit some tipping points and have some long lasting implications okay
[06:19] so while it is a very long lasting process you know what we do now will impact already how it will play out
[06:26] now if you look at other policies like financial stability uh it has a horizon of based on the financial cycle the financial cycle typically risk is building up in the background then it erupts and then translates into a crisis that's about a rise of eight to ten years or perhaps around that number
[06:44] there's this volatility paradox i mentioned often where is it is something which seems very safe very robust and doesn't move much uh that's actually is actually there's only a sign that risk is building up in the background and then erupts later on something which is more volatile might be more resilient but more easily to bounce back because it constantly moves around and it's also bouncing back more easily
[07:09] and essentially that's a 8 to 10 year
[07:12] horizon and if you think about monetary policy it's mostly a two-year rise.
[07:17] so it's much more cyclical it's about you know the business cycles and it depends on the stickiness of the prices.
[07:25] and you know so that micro financial of course long-term prospects too but it has a much shorter horizon.
[07:33] so if you think about the nuclear framework it's about the price thickness you don't talk about decades you talk about you know few years at most.
[07:41] and of course the climate interaction is also there and i will talk about this later on in monetary policy it might impact the benchmark the r star and we will go to this all-star in a minute.
[07:55] now what i want to do is i outline these basic concepts so i want to go beyond these basic concepts and then i want to talk about green finance and then issue raise some new issues there and then i talk in the second step i talk about green monetary policy so first the clean finance component and then the
[08:13] green monetary policy component.
[08:17] So the first thing is what is the sources of climate risk?
[08:22] So essentially the way and this came also in the poll question, you know, one way to deal with that you have tax pollution.
[08:27] So with taxi pollution, that's what we really the emissions of CO2 with taxes directly.
[08:33] But when you do clean finance, you tax essentially risk associated with that finance is mostly about risk.
[08:38] So it's risk associated with pollution.
[08:41] So if you imagine that there's particular risk attached to that and then you tax the risk, then you would also tax pollution if the pollution and risk is associated with each other.
[08:53] So the question is what risk is climate risk?
[08:56] So what are the sources of climate risk?
[09:00] Then of course there is uh the fer the first effect is that there are some climate events cause some risks.
[09:07] So there might be some flooding, there might be a drought, there are fires and so forth.
[09:09] So you have a lot of climate risks directly.
[09:14] and this might lead to stranded assets
[09:16] so standard assets are assets which are available but suddenly there's a climate event then the asset is worth much less
[09:24] but if you think about the risk in finance about stranded assets which is a big risk component it's not really about the climate events themselves it's much more about the policies suddenly the policies is changing an existing policy is changing and that means now suddenly the asset is worth much less
[09:43] or it can be existing policies there can be future policies but both of that leads to stranded assets
[09:49] so the risk associated with climate is from climate regulation and i think that's of course there's a risk with climate events but the bigger risk i would argue and more systematic risk
[10:01] so it's not localized but there's some flooding in a particular region or some drought in a particular region the big big risks for certain asset holdings is that suddenly there is a policy which outlaws certain activities
[10:15] or taxes it heavily that's essentially where the risk is coming from.
[10:20] and then the question is uh how do we if we tax that risk through uh climate finance or clean finance how will this uh play out.
[10:31] now the other thing is i would like to say of course if we want to focus on the risk we have to incorporate this in our stress test analysis.
[10:37] so when we regulate banks and so forth we have the internal capital adequacy assessment process has to be adopted to that.
[10:44] the portfolio of insurance companies and regulation what insurance companies how much equity have to put aside for this has to be affected.
[10:54] and also for many institutional investors or asset managers it has to play an important role of this.
[11:00] and there's parallel and integrated climate and micro scenarios.
[11:04] so we have to have not only in stress tests uh macro and economic financial scenarios but also climate scenarios.
[11:09] but the point i would like to make is that there's an interaction between this policy risk.
[11:17] and the straining asset and there's a feedback loop back and forth and that leads to potentially multiple equilibria.
[11:23] and that's a self-fulfilling profit prophecy so let me just illustrate that.
[11:29] uh if once you take political economy considerations into account things change to some extent so let's consider the following.
[11:39] let's suppose there is limited climate risk provisioning so we don't have the risk of assets becoming stranded assets hence there is few risk weights on it there is not much equity put aside for the possibility that assets are worth much less.
[11:57] so then there will be of course huge political opposition to impose strong political measures and there will be lobbying pressure to not to do that.
[12:06] and because of the strong lobbying pressure there will be not so many stranded assets which justifies that you didn't put so much risk rates and so many risk considerations into place in the first place okay so this one and one.
[12:17] outcome essentially is there is not much risk capacity build up for potentially stranded assets.
[12:26] that means there will be a lot of lobbying pressure a lot of resistance to have these policy measures for climate change and hence the assets will not lose it will not become stranded and that justifies why there was only some limited provisions in the first place but there's a second outcome.
[12:44] the second outcome is that you know in the first step we say okay wow it could be that these assets become stranded and hence we have to put a lot of equity cushion into the banks and all the financial players.
[12:55] and then this opposition that uh there will be uh you know these assets will then become stranded will be much less because we have already put some buffers some reserves there and then it would be much more likely so that we have stranded assets which the exposed people say i told you so we need all this buffers because the assets become stranded so it's there's a self-fulfilling prophecy.
[13:19] of self-fulfilling element to it which is important to keep in mind once you have to recognize that most of the risk of the stranded assets comes actually from policy uncertainty and i will come back to this policy uncertainty further and further because i think that's if you take the finance perspective that's an important aspect to shed a light on.
[13:41] and what i want to change your mindset a little bit is it's a little bit of a strange way of thinking but you know we can put some eguvian tax on uh the pollution that's a direct way of doing that.
[13:53] but we can also what i call a policy uncertainty tax on that.
[13:58] how does this work so this works essentially that we say we create policy uncertainty because of this policy uncertainty for polluting a production capacity it is actually more expensive to fund that because this uncertainty will cause you need some risk premium somebody who is funding you he will service premium because of this policy uncertainty.
[14:20] so essentially uncertainty itself the policy uncertainty acts like a tax.
[14:25] instead of a regular tax whether i charge your pegobian tax and they have to pay some tax to the government said i don't charge a tax directly i create uncertainty policy uncertainty and then the investor says oh my god there's so much uncertainty i would like to have a risk premium food is uncertain so the risk premium itself is essentially than the equivalent tax.
[14:45] okay so and this risk premium itself has the same feature as a begin tax it is stirring investment away from polluting uh production capacity more to clear green production capacity but there's one big difference.
[15:01] and if you think about it so one big difference is that in the begovian tax there's a government getting some tax revenue.
[15:10] but while you would do this policy uncertainty tax there's actually no tax revenue for the government it's just socially wasted because the investor has to bear some additional risk which is created.
[15:21] endogenously.
[15:22] And this additional risk is essentially, you know, welfare loss to everybody.
[15:26] It's still steering the economy away from, uh, from polluting assets.
[15:32] So it has still this feature of steering the economy, but it doesn't generate a tax revenue over the government which we could allow you to raise some, uh, below some other taxes.
[15:44] Okay, so there's a huge welfare loss.
[15:46] So it's much more direct and much more obvious.
[15:48] Again, we pollute, we tax evolution itself rather than, you know, we create uncertainty and then through the financial arrangements because of this increased uncertainty, we will ask for more, uh, financing limitations.
[16:02] And this way we steal the economy because it doesn't generate any, uh, income for the government.
[16:08] It has the same element in terms of pushing the economy in one direction, but it does we lose the tax income.
[16:15] So that's on a static perspective.
[16:17] So you might think, oh, that's already a little bit a crazy approach to.
[16:21] do it but it might be politically more feasible approach.
[16:24] i you can also put this in a time dimension where you get some time consistency perspective so let me just illustrate this again.
[16:35] where we are now take an excellent perspective and an exposed perspective.
[16:40] okay so ex-ante i just said it would be much better to have some the goovian tags explicitly laid out.
[16:48] uh have a clear part how to scale it up over time and remove policy uncertainty don't work with policy uncertainties as a way to have an indirect begun tax.
[17:00] remove policy uncertainty so you can actually what you can do is you can agree specified price path for co2 emissions.
[17:09] or you can also have a pre-specified quantity path so if you have a pre-specified price path for co2 emissions you can do this with co2 taxes a carbon tax and this way you reduce risk premium if
[17:22] you're more focused on the quantities that you see how much the quantity of emissions should be controlled and i want to put certainty on there.
[17:30] you can do um tradable permits so you have pollution permits and you fix the quantity and you scale the quantity down over time so this way both way whether you fix some prices or you fix some quantities you can reduce uh the risk.
[17:44] this way you can also do a mixture of both so if you have pollution permits and then you manage the amount of pollutions permit outstanding based on the price but that's another way to capture both to minimize the price volatility and the quantity of volatility they have a convex combination of the two so from an excellent perspective.
[18:05] actually what we do is we fix the path going forward.
[18:11] this gives a lot of certainty that makes it actually easier for the new technology to be invested in because everybody knows what the price will be this year to price for example and this way uh there is a clear part.
[18:24] there's less risk involved and that actually reduces the risk premium and that makes it easier to invest.
[18:32] but once you lock yourself in at this this part you might learn over time later on that you know the whole environment little threat is much bigger than initially thought.
[18:44] and you might be much closer to a tipping point.
[18:47] it might become apparent that you know the gulf stream is uh stopping and is you know once it stops you can't bring it up and start it again so that the tipping point is much more closely related to that.
[18:56] so in order to have resiliency you need this flexibility that you can adopt and react and reoptimize and all that so exposed you would like to keep some flexibility and that's where the classic tension is between exactly committing to a fixed thing and exposed being or flexible to readjust and that's where you have this timing consistency.
[19:15] so excellent you would like to fix a part commit to a fixed path exposed you would like as you learn more readjust and stay flexible.
[19:25] that's where the tension and time and consistent detention comes in as well so let me just say so.
[19:32] i think it's it's a it's not a good idea to work with policy uncertainty because treating policy and certainly nobody says it this way but that's essentially what's going on.
[19:39] i create a lot of policy uncertainty potentially stranded assets that makes the funding of potentially standard assets very expensive because of a higher risk premium.
[19:51] it's better to charge taxes straight out and make it in a very deterministic way where you know there's less uncertainty so that's less welfare loss and achieving that but you have to keep in mind that exposure would like to re-optimize if new things are learned so there's the same consistency one has to handle on top of it.
[20:12] now another issue i would like to mention which is an interesting phenomenon is that you can either stop tax pollution directly or the output of the firm which pollutes or it can tax one particular input so if
[20:28] i have here a production function
[20:30] there's an output and then there's input
[20:32] is labor capital and pollution
[20:34] and if i let's suppose if there's a
[20:36] highly polluting firm i charge a higher
[20:39] tax on capital financing so if you go
[20:42] for green finance you charge put the tax
[20:45] on capital financing so that means
[20:47] essentially you charge one input higher
[20:50] than the other input of course you
[20:51] distort the input ratio between labor
[20:54] and capital and it's not clear why would
[20:56] you do that you might say have a general
[20:58] tendency we should actually you know
[21:00] favor labor but that's a different
[21:01] objective but it's not clear if you know
[21:04] you have a high polluting firm you
[21:06] should actually then distort the labor
[21:09] capital ratio because the labor could be
[21:11] equally part of the production so that's
[21:13] essentially another distortion has to
[21:15] watch out for so that's another argument
[21:17] not to necessarily focus only on green
[21:19] finance because you focus only on the
[21:21] funding of the capital
[21:24] but you might want to tax the output
[21:26] good uh significant but of course
[21:27] politically
[21:29] the distribution aspect so it has to
[21:30] take into account as well
[21:35] now finally i would like to say how to
[21:36] implement this clean finance thing and
[21:38] what are the different options on the
[21:40] green finance elements so of course one
[21:43] is to bank regulation so you just put
[21:45] certain
[21:46] risk weights uh on that so if you have
[21:49] potentially stranded assets uh you have
[21:51] a higher risk rate and the bank has then
[21:53] has to provide more equity financing for
[21:56] that which is more expensive and this
[21:58] way you make the bank a sound should
[22:00] that this assets become stranded because
[22:02] some policy major is taking uh into
[22:05] place
[22:07] and there's all these challenges on the
[22:09] taxonomy where right now in europe in
[22:11] particular the european commission is
[22:13] developing taxonomy what's green and
[22:15] what's less green and so forth
[22:17] the challenges there are that the
[22:19] following that you know some green
[22:21] investments might be inherently more
[22:23] risky okay so but we want to favor a
[22:26] clean investment so the question is a
[22:28] challenge there if you focus on risk
[22:30] if you focus on risk if the green
[22:33] investment is more risky how to deal
[22:34] with that
[22:35] okay the other challenge is if you go
[22:38] more from a central bank perspective is
[22:40] that you know you
[22:42] have more if you say if you the
[22:44] authority decides what's green and
[22:46] what's more green and what's less green
[22:48] um then actually an authority
[22:51] is really directing credit in a certain
[22:54] direction or not and then you're subject
[22:56] to lobbying pressure you're subject to
[22:58] crony capitalism and all that if you
[23:00] just say all
[23:02] things are based on riskiness but then
[23:05] it's it has a neutral standard and as
[23:07] soon as you have some subjective thing
[23:09] about something is more or less green
[23:12] you have to be very careful that very
[23:13] objective measures if you don't have
[23:14] these objective measures then actually
[23:17] you're subject to lobbying efforts and
[23:19] you see the sloping efforts already are
[23:22] going on and who decides what's green
[23:24] and what's not green and there's all
[23:26] this green washing many things are
[23:27] suddenly treated as green even though
[23:30] they're not so green after all
[23:32] and this shows very clear in two papers
[23:34] i would try to highlight
[23:36] esg ratings or two analysis
[23:38] were one essentially shows that if you
[23:40] look across esg ratings
[23:43] the correlation is very very low okay so
[23:45] but
[23:46] it should be that the certain assets
[23:48] they're either green or not green and
[23:50] why is the correlation so low that
[23:52] depending who is rating it some people
[23:54] read it this way and the other people
[23:55] are rating the other way and also if you
[23:57] make a correlation there's an imf paper
[24:00] showing if there's a correlation
[24:03] the between
[24:03] emissions and the esg rating it's also
[24:07] extremely low
[24:08] and so you might say you know the esg
[24:11] rating is early stages so there are
[24:13] still some hiccups and it takes a while
[24:15] to grow but there's many many challenges
[24:18] and of course it's a lucrative business
[24:20] to be in this esg rating because you
[24:21] decide who
[24:23] can get cheap funding who is getting not
[24:25] cheap funding from the financial markets
[24:28] and that's very lucrative
[24:30] as well so there's a lot of money to be
[24:33] made
[24:34] so let me slip
[24:36] keep this for the
[24:38] green finance aspects
[24:40] now let me move for a few minutes to
[24:42] green monetary policy because that's
[24:44] equally important we've already alluded
[24:46] to it financial regulation
[24:48] you know interacts with monetary policy
[24:50] of course
[24:53] now
[24:57] so central bank policy produces of
[24:59] course spillovers it has implications
[25:01] and there's always these principles of
[25:04] market neutrality particularly if the
[25:05] center banks are purchasing assets
[25:08] and the question is what does market
[25:10] neutrality mean
[25:12] and should market neutrality be
[25:15] really maintained
[25:17] so there's an economic uh aspect to it
[25:21] where you say you know if the market if
[25:23] there's a market failure should central
[25:25] bank be so neutral to keep the market
[25:28] failure
[25:29] okay so that's one aspect okay market
[25:31] neutrality is not a guiding principle
[25:34] because why would you stick with market
[25:36] failure if without intervention there's
[25:39] a market failure now with the win in
[25:40] such a way not to fix the market failure
[25:43] that's an economic uh argument there's a
[25:46] political argument as well the political
[25:48] argument goes the following it says you
[25:50] know if all of the politics tries to
[25:53] make the
[25:55] whole environment
[25:56] more to have a better environment in the
[25:59] sense that there's less pollution
[26:02] why should the central banking not be
[26:04] part of it okay
[26:07] and that's another that's another
[26:08] argument that we should to give up
[26:10] market neutrality
[26:12] and that's a things to consider
[26:15] now the next thing i would like to raise
[26:17] is that you know typically for monetary
[26:19] policy it's often argued you know our
[26:22] star is a guiding
[26:24] measure so it guides us whether monetary
[26:26] policy is contractionary or expansionary
[26:29] if the policy is above our star then
[26:31] it's a conductionally contractional
[26:34] measure if it's below our star it's an
[26:36] expansionary measure and what determines
[26:39] our stock and of course our star is
[26:41] driven by a lot of structural forces how
[26:44] big is the precautionary savings in the
[26:46] economy what's investment what's the
[26:47] growth rate of the economy all of this
[26:50] is determining our r star
[26:53] and of course if our star is very close
[26:55] to zero there's less room and less space
[26:58] for monetary policy because you're
[26:59] hitting essentially much more easily the
[27:02] zero lower bound or the effective lower
[27:04] bound or reversal interest rate as well
[27:06] so this our star is a very important
[27:08] concept and it is interesting to figure
[27:10] out how does the climate policy other
[27:13] dimension how does it
[27:15] really impact our star and if it impacts
[27:18] our star then it should impact all the
[27:21] monetary policy because how can it be
[27:24] isolated from
[27:26] from our start
[27:27] so our star is
[27:31] let's just think about how could the
[27:33] monetary how can climate policy impact
[27:35] our star so if like in europe there's a
[27:38] huge investment
[27:39] direction now towards
[27:42] climate issues
[27:44] and that leads to huge investment demand
[27:46] so huge demand is going in this
[27:48] direction
[27:49] and that leads of course to an increase
[27:52] in the interest rate holding everything
[27:54] else
[27:55] fixed uh so c transparent was asked our
[27:58] increase
[27:59] so what does this mean then one for
[28:01] monetary policy does it mean in general
[28:03] we should have a higher more tighter
[28:06] higher interest rate
[28:07] but there are some other countervailing
[28:09] effects as well
[28:10] if
[28:11] the
[28:13] the case that you know we redirect a lot
[28:15] of investments into uh clean
[28:18] green investments and if they don't
[28:20] contribute to higher consumption growth
[28:22] down the road
[28:23] then actually that lowers our star so
[28:26] this uh one of my favorite formulas so
[28:28] the year of the free rate is just the
[28:30] time reference rate then we have this
[28:32] ramsey term which is expected growth
[28:35] consumption growth rate in the economy
[28:38] times uh
[28:40] the inter table analysis of
[28:41] substitutions or this gamma is the
[28:43] curvature of the utility function
[28:45] minus this precautionary savings term
[28:47] that depends on the volatility of
[28:48] consumption and again this gamma is is
[28:52] also the curvature of the utility
[28:53] function is also the risk conversion
[28:55] coefficient
[28:56] so you have two forces pushing in the
[28:59] opposite direction pushing our star down
[29:01] one is if the expected consumption
[29:03] growth rate goes down because you do all
[29:05] these climate investments which don't
[29:07] translate into higher consumption growth
[29:08] but translate into a cleaner environment
[29:12] and that's already one
[29:14] component pushing our star down and then
[29:16] you have all this increased risk because
[29:18] of strained assets or political
[29:20] uncertainty
[29:22] from these policy measures or just
[29:24] strictly climate risk from climate
[29:26] events that leads to a higher
[29:28] consumption uncertainty leads to more
[29:32] leads to business minor sign leads to a
[29:34] lower all-star as well so that's those
[29:37] are the channels and that's an
[29:38] interesting research
[29:41] challenge to figure out you know will
[29:43] this effect which increases because
[29:44] there's huge investment demand that will
[29:46] increase our star or it will be
[29:49] decreasing because of these other two
[29:50] forces and how to capture this and
[29:52] calibrate this in a coherent way
[29:56] in a framework
[29:59] now of course what are the instruments
[30:01] so what for monetary policy what are the
[30:03] instruments of course you can change the
[30:05] haircuts when monetary policy lends to
[30:08] banks and charges for some assets in as
[30:11] collateral they can charge a higher
[30:13] haircut or lower haircut so how many
[30:16] assets you have to give the central bank
[30:17] as a collateral depending uh what the
[30:20] haircut is
[30:21] the center bank also are very active in
[30:23] uh
[30:24] in purchasing assets so here i've just
[30:27] that's a figure just drawn from my book
[30:29] we're seeing just how much the assets
[30:31] exploded in since the global financial
[30:33] crisis and the kobe crisis again
[30:35] how big is the balance sheet so that's
[30:37] the asset side of the balance sheet and
[30:38] that's below the zero line is the
[30:40] liability of the balance sheets you see
[30:41] they're expanding a lot so they bought a
[30:43] lot of assets that bought a lot of
[30:44] corporate bonds and other risky assets
[30:47] and some of them many of them are
[30:49] non-green assets
[30:51] and only a few of them are green assets
[30:53] should essentially the asset purchase
[30:55] program uh the newly purchased assets
[30:58] should be tilted towards green assets or
[31:00] not and again we get to this credit
[31:02] policy then we favor one uh
[31:05] investment over the other investment
[31:07] like what we did in the 1970s and there
[31:09] was huge movement away from this credit
[31:12] policy and be more neutral be market
[31:14] neutral
[31:16] even more aggressive approach would be
[31:18] to say we have the existing balance
[31:21] sheet as a lot of non-green assets let's
[31:23] sell them and replace them with green
[31:25] assets that would be a more radical move
[31:28] even further
[31:31] now if the final thing i would like to
[31:33] mention is that uh green monetary policy
[31:36] how does it interact with central bank
[31:38] independence and i alluded to this this
[31:41] accountability argument before
[31:44] so first of all uh if you do monetary
[31:46] policy in a country without central bank
[31:49] independence so it's an autocratic
[31:51] society and this and monetary policy is
[31:53] essentially done by the finance ministry
[31:55] anyway because it's not outsourced to an
[31:57] independent agency like the central bank
[31:59] which independent central bank
[32:02] then this is not an issue
[32:04] so they
[32:05] then it's fine but typically the
[32:08] understanding is going back to our
[32:10] functions the resource allocation
[32:12] redistribution that should be done by
[32:15] elected bodies so this should be done by
[32:18] uh by the sovereign the people who elect
[32:21] some representatives will then decide
[32:23] about the resource allocation
[32:24] redistribution
[32:28] but in many countries in democratic
[32:30] countries will have as independent
[32:31] central bank
[32:33] you have a clear specified mandate for
[32:35] the central bank so like in the u.s fed
[32:38] has a dual essentially a triple mandate
[32:40] so it's not only about
[32:42] low inflation or price stability but
[32:44] also
[32:46] employment and also the long-term
[32:48] interest rate should be stabilized
[32:50] these are the mandates for the u.s fed
[32:52] while the ecb in europe has much more
[32:55] hierarchical
[32:57] mandate it first and foremost cares
[32:59] about the price stability and to the
[33:02] extent this price ability is satisfied
[33:04] it has secondary
[33:06] objectives to support the overall
[33:08] european union-wide objectives
[33:11] but then it raises the question
[33:14] so
[33:15] if the first objective is satisfied and
[33:17] then we go to the secondary objective
[33:19] who picks
[33:21] which secondary objective should the
[33:23] monetary policy focus on
[33:25] and should it be the central bank itself
[33:28] choose its preferred secondary
[33:31] objective
[33:32] or should it be an elected body like the
[33:34] european parliament
[33:36] deciding what the secondary objective is
[33:40] and
[33:41] you know and that's but then if the
[33:44] elected authorities are anyway deciding
[33:46] what the secretary objective is why
[33:48] don't this elected body doesn't
[33:49] immediately directly imposed on begotten
[33:52] taxes in the same institutions same
[33:55] parliament or congress deciding on
[33:56] peculiar taxes in the first place why do
[33:58] you go through
[33:59] the central bank
[34:02] but in any case you see already how
[34:05] subtle this is interaction is and it
[34:07] drags the central bank deeper in a
[34:09] political realm which she typically
[34:11] should try to stay away from because
[34:13] central bank should not be part of the
[34:15] political cycle it should be independent
[34:18] in order to overcome this time
[34:19] consistency problem typically simple
[34:21] banks try to overcome not to be part of
[34:23] political cycle
[34:25] emotionally
[34:27] so let me conclude
[34:29] and what i try to point out in this
[34:33] short presentation is that what are the
[34:35] challenges with climate change and the
[34:37] interaction with finance and monetary
[34:39] policy
[34:40] and i said that first of all it's very
[34:42] important to think about the three
[34:44] functions of policy allah richard
[34:46] muskraft
[34:49] allocation redistribution and stability
[34:52] where central banks have a huge role in
[34:54] price and financial stability to play
[34:56] and the cleaning of the instruments
[34:59] should we make
[35:00] all these instruments we're having
[35:02] multi-purpose so they have to satisfy
[35:04] the initial purpose of the policy
[35:06] instrument
[35:07] uh like stress stability for or
[35:10] might be in extreme health or something
[35:12] else should we clean them all
[35:15] or make them multi-purpose or should we
[35:16] keep them targeted and we have special
[35:18] targeted instruments also for the
[35:20] climate aspects and then there's a
[35:22] strategy of horizons where we say you
[35:25] know there are certain policies which
[35:27] have different horizons monetary policy
[35:29] is
[35:30] two three-year horizon depending on the
[35:33] business cycle financial stability seven
[35:35] eight your horizon
[35:36] while climate change is different it's
[35:39] over decades it's a very long thing but
[35:41] we have to act now too so the
[35:43] implications we cannot wait for decades
[35:46] but the implications but overall the
[35:47] horizon is a different horizon
[35:50] and then there's a green finance
[35:52] component
[35:54] and what makes
[35:56] green finance work essentially if you
[35:57] change the risk
[35:59] and the risk you can change through
[36:00] policy uncertainty but that's a very
[36:04] ineffective way so a direct pigoubian
[36:06] tax is much more effective to deal with
[36:08] that
[36:10] while a climate risk uh you know trading
[36:13] through political uncertainty is also
[36:16] creating some tax implicitly but it's it
[36:18] has no tax revenue it's just totally
[36:21] wasted uh in terms of creating some
[36:24] additional
[36:25] risk premium costs for the company to
[36:27] fund itself without
[36:29] you know because you get this utility
[36:31] from this risk
[36:32] for the investor
[36:34] instead of you know some third part of
[36:36] the government getting some dollars from
[36:38] that then there's this whole issue about
[36:39] green washing dsg rating at this stage
[36:42] essentially not doing their job
[36:46] and then there's a distortion of the
[36:47] right margins you distort of course the
[36:50] capital versus labor ratio as well
[36:52] and then there's this whole timing
[36:54] consistency i was talking about uh you
[36:56] might want you want to bring essentially
[36:57] uncertainty down
[36:59] prescribe a clear path ex-ante to
[37:02] minimize service premium but then
[37:04] exposed you might have to readjust as
[37:07] well and then in terms of monetary
[37:08] policy and green monetary policy
[37:11] it is uh
[37:13] uh
[37:14] there's a you know this new policy will
[37:17] be acting like a supply shock
[37:19] because there's a lot of restrictions
[37:21] regulatory restrictions coming in how
[37:23] will this affect our star there will be
[37:26] investment boom hence it might be
[37:28] all-star might go up but there's also
[37:29] more uncertainty coming in and there
[37:31] will be lower consumption growth both
[37:33] will push our star down and it might
[37:35] also threatened the
[37:38] uh
[37:40] the
[37:42] independence of the central bank because
[37:44] it gets in the political room and then
[37:46] you know once the center bank makes
[37:47] policy on this dimensions what prevents
[37:50] other politicians to say oh
[37:53] because you to be part of our policy
[37:55] room we would like to be part of your
[37:57] monetary policy room as well
[38:00] so with this let me thank you a lot for
[38:02] participating and being part of it and i
[38:05] try to
[38:06] perhaps
[38:08] go to some of the questions
[38:12] which were
[38:13] put in in the q a and then answer them
[38:17] but i will only pick a few because it
[38:19] will be hard on the fly
[38:21] to
[38:22] answer them so thanks again for
[38:26] discussing this
[38:31] and uh
[38:33] it's probably best if i come back to you
[38:35] by answering these questions uh offline
[38:38] so this way we can uh
[38:40] answer them more clearly
[38:48] you