Federal Reserve Chairman Jerome Powell speaks during a press conference in September 2019.
The Fed officially joined the group that advocates using financial regulators to address climate change last December, claiming that climate change poses a potential threat to U.S. financial stability.
The Fed’s new membership is called the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). (NGFS), was established at the Paris Summit in December 2017. The organization requires members to sign the Paris Climate Agreement.
The U.S. rejoined in January of this year under Biden‘s executive order after Trump (Trump) announced his withdrawal from the Paris climate agreement in 2017.
The Federal Reserve, for its part, announced its accession to the NGFS on December 15 of last year, planning to incorporate the effects of global warming into its regulatory rules. Although the Fed has not yet proposed a framework to address climate change, it said it wants “banks to have systems in place to properly identify, measure, control and monitor” all major risks, including climate risk.
NGFS promotes green finance and aims to develop recommendations for central banks, manage risk and raise funds for green and low-carbon investments, according to its website. The organization has nearly 100 members and observers, including the People’s Bank of China, the European Central Bank (ECB) and the International Monetary Fund.
Several members of Congress have expressed concern that the Biden Administration and climate activists may be using financial regulation as a backdoor to achieve green policies. At the same Time, lawmakers have questioned whether the Fed’s entry into the NGFS may have politicized access to capital for some industries or stifled bank financing for sectors such as coal and carbon, oil and gas.
Rep. Andy Barr (R-Texas) told that “this weaponization of financial regulators, including some of the NGFS proposals, will jeopardize access to capital for businesses that operate legally in the United States.”
“The Biden administration’s attack on the energy industry is a threat to jobs and household energy costs in a generally uncertain economy.” He said.
In a letter to Fed Chairman Jerome Powell and Vice Chairman for Regulation Randal Quarles, Barr and 46 House members said, “We urge you not to consider (in the stress test) without proper consideration of the methodology, flaws and challenges of implement such (climate-related) scenarios.”
Stress testing, a test implemented in the U.S. after the Great Recession, is the process by which central banks determine whether financial institutions have sufficient capital to withstand various economic risks.
Republican members of Congress also warned that a pattern of “de-banking” of legally operating coal, oil and gas companies would be an unwise move, calling it a politically motivated decision and noting that “the introduction of climate change stress testing threatens to perpetuate this trend “.
The MPs cited the shortcomings of the frameworks introduced by some European regulators and advised against copying these paths. Their letter reads, “Those suggested paths forward are fraught with speculation, inconsistency, and a reliance on long-term projections.”
The Fed’s response
In a letter responding to the lawmakers, the Fed said they have not implemented any measures on climate topics and that everything is still in the evaluation and investment phase to better understand the potential impact of climate change on U.S. banks.
The Fed said the central bank’s current bank stress test examination shows that its “capital adequacy span is much shorter than the time span over which the effects of climate change are likely to be felt,” indicating the difficulty of properly measuring climate-related risks.
The Fed noted that its climate risk analysis will “evolve on an ongoing basis” and ensure that policymakers will take a “prudent, deliberate and transparent approach to this work. In the letter, the agency said, “The Fed will not implement any NGFS proposal in the United States that is not in the best interest of the U.S. financial system.”
In response, John Cochrane, an economist at Stanford University’s Hoover Institution, said the move that the Fed and other central banks “are diving headlong into climate policy” is clearly the wrong move.
“It’s a mistake.” Cochrane noted in a report that “this approach will undermine the independence of central banks, undermine their ability to fulfill their primary role of controlling Inflation and stopping financial crises, and undermine confidence in their impartiality and technical competence. And it wouldn’t help the climate.”
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