Green Quantitative Easing: magic bullet or shot in the foot?
By Anna-Bryndís Zingsheim Rúnudóttir, BSc Economics and Management Student at King's College London
In the current health and economic crisis, the debate about economic recovery has been as controversial as ever. Again, hard opinion about the potential benefits and pitfalls of Green Quantitative Easing programmes (Green QE) has emerged as Central Banks around the globe try to boost their economies. Is Green QE the answer to calls of environmentalists, economists, and conscious consumers and investors alike?
In essence, Green QE is quantitative easing made green. Central Banks use their policy instruments to influence asset markets, and through their mechanism, Central Banks seek to stabilise inflation and unemployment rates. The idea with quantitative easing is that a Central Bank can purchase large amounts of assets in financial markets as a last resort in times when the policy rate by itself does not suffice to boost the economy. Green QE is merely the purchase of assets by Central Banks that will finance green investments, either by corporate bodies or governments. As of now, Green QE has not been implemented per se, and it remains a controversial matter.
A positive consequence of Green QE, which constitutes the main argument for the green programme, is the strong short-term signal for financial markets; even long-term signals depending on the structure of the programme. It would direct cheap financing to critical green investments in renewables, consumer products, agriculture and heavy industry. In addition, the involvement of credible and influential economic institutions will most certainly spark the necessary discussion about long-term sustainable growth.
However, critics argue that because the green asset market is so small in comparison to conventional markets, Central Bank asset purchases would swallow up the whole market and possibly prevent correct climate risk pricing. That would deter some investors from getting involved. The interesting part is, though, that QE programmes so far have been skewed towards carbon-intensive industries, thus posing the threat of mispricing in those markets. For example, 63% of the European Central Bank's and 49% of the Bank of England’s bond purchasing programme was geared towards high carbon sectors (Nyborg, 2017). The critics' points about climate risk mispricing are indeed valid. However, climate risk has so far been completely ignored and therefore caused mispricing in carbon-intensive markets, which has led to adverse effects on the environment. Green QE might, in fact, help to mitigate those shortcomings.
Furthermore, the leading view of many economists is that Central Bank action is to be coordinated with government policies. Climate action is no exception. Many governments, institutional and individual investors are already seeing the growth opportunities in green investments. Therefore, the green bond market could be expanded within a relatively short time—unfortunately, most Central Banks' criteria on asset purchase eligibility favour carbon-intensive assets.
The difficulty with the above argument lies, of course, within the taxonomy of what is considered 'green' and what is considered 'brown'. The definition ought to be broad enough to include small scale start-ups but also narrow enough to prevent opportunistic behaviour of those presenting 'brown' investments as 'green'. Therefore, a whole lot of work still needs to be done on the mere definition of Green QE.
Moving on to the argument of neutrality and Central Bank credibility, most would agree that Central Banks are credible precisely because they are independent of politics. Critics of Green QE like to point out that Central Banks would lose their credibility once their mandate shifted towards environmental policies which, in their opinion, should be left to politicians. Again, the interesting part is that recent QE programmes have greatly favoured the carbon-intensive industries. To those favouring Green QE, this unfortunate fact does not demonstrate neutrality. Plus, there is also an argument to be made as to how much any entity can be completely free of politics.
In addition, Central Banks' mandates highlight the stabilisation of their respective economies. Although it is tough to factor in climate risk, many scientists and economists have predicted the cost of climate change to be far greater than the costs of reducing emissions. Therefore, Green QE presents a sanguine step in the right direction for the environment but also for the sake of future economic stability, especially to combat the current global recession.
One should bear in mind that the global warming crisis is different from previous economic crises. Economic crises are different since they are reversible, whereas ecological degradation and climate change are not. Green QE is a useful tool to help humanity on its way to a sustainable future, but it is far from being enough. Unfortunately, it seems unlikely that any Green QE programmes will become a reality any time soon.
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Jourdan, S. (2020). Green QE is about more than buying climate-friendly bonds. Retrieved from https://www.positivemoney.eu/2020/01/green-qe/
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Nyborg, K. (2017). Central bank collateral frameworks. Journal Of Banking & Finance, 76, 198-214. doi: 10.1016/j.jbankfin.2016.12.010
Pushback and practicalities limit hopes for ‘green QE’ from ECB. (2020). Retrieved from https://www.ft.com/content/d3f52ba6-fef2-11e9-b7bc-f3fa4e77dd47
The climate impact of quantitative easing - Grantham Research Institute on climate change and the environment. (2020). Retrieved from: https://www.lse.ac.uk/granthaminstitute/publication/the-climate-impact-of-quantitative-easing/
The rights and wrongs of central-bank greenery. (2020). Retrieved from https://www.economist.com/leaders/2019/12/14/the-rights-and-wrongs-of-central-bank-greenery
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