The RBA Review: A missed opportunity for climate transitions
The much anticipated Review into the Reserve Bank of Australia has been widely applauded for making a series of recommendations that will modernise the way the RBA operates and makes its decisions. But in one important area, the Review’s recommendations will leave Australia’s central bank falling behind many of its international peers.
The Review considered whether the RBA should play a more active role in climate policy. Although the Review affirmed the RBA’s recent moves to incorporate climate risks in its analysis of the economy and the financial system, it explicitly recommended against the RBA using its monetary policy powers to reduce the risks of climate change.
In the words of the Review: “The Government should not make transition to a low carbon economy an explicit objective of monetary policy.” The Review reasoned that climate change was the responsibility of elected government, whose fiscal and regulatory tools could be more effectively deployed to drive decarbonisation.
In making this recommendation, the Review sided with recent comments by Jerome Powell, Chair of the central bank of the United States, the Federal Reserve, who stated in January that “We are not, and will not be, a climate policymaker.” However, other central banks, such as the Bank of England and the European Central Bank, are beginning to recognise their role in addressing climate change, and have taken steps to green their policy frameworks.
The original terms of reference for the Review did not mention climate change. That one of the Review’s 14 recommendations was about climate change reflects the growing calls for central banks around the world to take climate change seriously. The Review itself notes the submissions it received and consultations it conducted made it clear that climate change is a community priority.
The Review talks about climate change through the lens of ‘climate risk’. In this framing, climate change is understood as a risk to financial stability. An influential report released in 2020 by the Bank of International Settlements – the central bank of central banks – found that climate change risks could be “the cause of the next systemic financial crisis”.
Thinking about climate change as a financial risk is focused on capturing the risks of climate change to the financial system. Those risks are two-fold: the physical risks of climate impacts such as rising sea levels or prolonged drought, or the transition risks of societal responses to climate change, such as climate policy setting stringent emissions targets.
Climate change, of course, is more than a financial risk; it represents a grave threat to life itself. Nonetheless, understanding climate change in this way is placing it on the agenda of central banks around the world.
Monetary policy decisions such as whether to increase or decrease official interest rates have important implications for climate change, by affecting the cost of borrowing for green and fossil fuel investment, alike. Climate change, in turn, has implications for inflation, because natural disasters can out upward pressure on the price of goods such as food. UK-based research and campaigning organisation Positive Money this week dubbed this phenomenon “climateflation”.
The relationship between climate change, inflation and interest rates has led to questions about whether the mandates of central banks should be extended to cover climate change. The Bank of England has moved in this direction. In 2021, in addition to the 2 per cent inflation target, the Chancellor added the “transition to a net zero economy” to the Bank of England’s remit.
Other central banks have also considered how their broader financial market operations may be inadvertently supporting fossil fuels, and how they could instead support lending for green investment. The European Central Bank has recently announced its intention to adopt climate criteria in the management of its own balance sheet and in its lending to the banking sector.
Central banks like the Bank of England and the European Central Bank themselves need to go much further on climate change. But their openness to play a role in climate policy points to the future of central banking.
There are important differences between the RBA and these central banks that mean policy frameworks cannot simply be transferred across. Given Australia’s acute climate vulnerabilities, the Review missed a significant opportunity to outline what a modern role for the RBA in addressing climate change and supporting a low carbon transition, in coordination with fiscal and regulatory authorities, should look like.
Sophie Webber is a Senior Lecturer and ARC DECRA Research Fellow in Geography in the School of Geosciences at The University of Sydney. Sophie studies the politics and economies of climate change adaptation and resilience, primarily in the Pacific region and Southeast Asia.
Gareth Bryant is a Senior Lecturer and ARC DECRA Research Fellow in the Discipline of Political Economy in the School of Social and Political Sciences at the University of Sydney. Gareth studies how public policy and public finance can create more sustainable, equal and democratic economies.