SYLVIE DOUGLIS, BYLINE: NPR.
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ADRIAN MA, BYLINE: This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma.
DARIAN WOODS, HOST:
And I'm Darian Woods. And as we speak, world leaders and tens of thousands of negotiators are ironing their shirts and their blouses. They're rehearsing their speeches for the climate talks that start in Glasgow this Sunday.
MA: This is clearly one of those meetings that couldn't be an email.
WOODS: That is probably true. This is where the world comes together to refresh their commitments to reduce carbon emissions and try to avoid catastrophic climate change.
MA: And, you know, here in the U.S., one unexpected agency is facing a lot of pressure to roll up its sleeves and help out with climate change - the Federal Reserve.
WOODS: It's like the student treasurer being asked to fill in for the injured quarterback.
MA: Yeah, exactly. And one of those people yelling at the Fed to get in the game is Alexandria Ocasio-Cortez. She and a few other lawmakers, they released a statement saying Jerome Powell, the Fed chair, wasn't being the climate change leader they needed and that he shouldn't be reappointed.
WOODS: Harsh words - but, you know, there's also peer pressure. Central banks around the world are seriously taking climate change into account. And the question is, will the Fed in the U.S. also take bold climate action?
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WOODS: This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.
MA: And I'm Adrian Ma. Today on the show - can the financial crisis hero be the climate crisis hero?
WOODS: Can the student treasurer also be the quarterback?
MA: Yeah, this should be the next episode of "Friday Night Lights." Do they still do that show? We're going to talk about three ways the Federal Reserve could help with climate change.
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WOODS: The Federal Reserve is the agency in charge with keeping our economy stable. And to do this, they really, really value their independence from political interference. They're always worried that a president might direct them to juice the economy before an election, leaving a big financial hangover afterwards. So the Fed is set up to be shielded from politicians.
MA: And partly due to this independence, the Fed is widely viewed to have been very effective at saving the economy during last year's pandemic recession. And it's tempting to look at this powerful agency free from political gridlock and think, why can't we focus that power onto solving climate change?
WOODS: Christina Parajon Skinner is an assistant professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania. She's also worked inside the Bank of England, where she picked up on some differences with the Fed in the U.S.
CHRISTINA SKINNER: I love my colleagues at the Bank of England, but their cafeteria cannot hold a candle to the Fed's cafeteria. I've never been able to get on the sort of shepherd's pie train.
MA: I have not ridden this train before. But, you know, aside from the culinary differences, the Bank of England really has led this international push for years trying to find a new role for central banks in managing climate change.
SKINNER: The Bank of England was one of the early adopters in thinking about how climate change could be a financial stability risk. And that, in turn, sort of shifted the way that the Bank of England did certain kinds of policy and regulation.
WOODS: Those policies and regulations that the Bank of England and other central banks have been considering fall into three main categories - buying green investments, monitoring who banks lend to and assessing how the financial system can cope with climate change shocks. And we'll go through each of those one by one and think about how they might apply to the Fed in the U.S.
MA: So first off, buying green investments like green bonds - in a crisis, to keep enough money flowing through the economy, the Fed can buy bonds. And a bond is basically a loan to somebody. So buying bonds means lending money. The vast majority of what the Fed buys is government bonds. But last year, the Fed tried to do something else.
WOODS: The Fed started buying a broad swath of bonds from companies. And the Fed didn't care whether it was buying Honeywell bonds or ExxonMobil bonds - just that it was propping up the general bond market. Now, that raises the question - could the Fed help out with climate change goals by, say, buying more Honeywell bonds and supporting solar panels and buying fewer ExxonMobil bonds and discouraging oil drilling?
MA: And this divestment from polluting companies is definitely something that other central banks have started doing - most notably, the Bank of England.
SKINNER: They've been told to say focus on sustainability, including when you're making decisions about which company's debt to buy.
MA: But Christina says the Fed doesn't currently have the legal standing to change whose bonds it buys based on climate considerations.
SKINNER: So if they started to use their tools to try and accomplish any policy goal, climate change or any other policy goal that isn't in their mandate - right? - they would have to have Congress give them a new goal.
WOODS: And even if Congress can pass a law saying that the Federal Reserve should help mitigate climate change, Christina is skeptical that the Fed should be doing this. How do they decide what's a green company and what isn't?
SKINNER: We either want to have the Treasury make that decision, or we want Congress to sort of outlaw industries. We don't want to sort of accomplish that goal through these unelected central bankers.
MA: Not every economist agrees with Christina. Other central banks have bought green bonds, and the sky hasn't fallen. But Christina herself, she doesn't think this is such a good idea for the U.S.
WOODS: Now, there is a second way that central bankers might be able to help save the planet - bank supervision. Essentially, the Fed and other regulators scrutinize banks lending to businesses that could be risky in the face of climate change.
SKINNER: It does, you know, routine exams of the balance sheet, the business model to make sure that they're safe and sound, right? That's actually statutory language - safe and sound.
WOODS: It sounds very cozy.
SKINNER: Yes, yes. The Bank Holding Company Act - very cozy piece of legislation.
MA: I have trouble thinking of a piece of legislation as cozy, but I think this is it.
MA: So, for example, the Fed could say to a bank, we think your lending to beachfront property is risky in the face of rising sea levels, and your lending to a coal company is a bad investment if the government bans coal mining. So those investments don't keep the bank safe and sound.
SKINNER: If I was a betting woman, I would say that's where you'll see the Fed taking its first steps in terms of thinking about how climate change interacts with its mandate.
WOODS: But Christina adds that under the current laws, that would be in a fairly soft way - kind of encouraging banks to make more climate-resilient investments, not wielding a big, heavy stick.
SKINNER: It's pretty rare on the supervisory front for a bank to do something - right? - short of violating the law or regulation, to do something that would bring an enforcement action from the Federal Reserve.
MA: Finally, the third possible tool for the Fed - the Fed can factor in climate change when it's thinking about the overall financial stability of the economy.
WOODS: The Fed is charged with protecting us from crashes and bubbles, and one way they do that is model out what might happen to banks in a crisis. It's called a stress test, and some central banks around the world have tried to build climate risks into those stress tests. The Bank of England and also the European Central Bank are two notable examples. They've made it real.
MA: And the Fed in the United States is making tentative steps towards this. In September, Fed researchers published a paper that showed how the Fed could model climate risks. Bottom line - these stress tests might show that banks need to hold on to more money as kind of a safety net in the face of the climate crisis.
WOODS: But for those stress tests or really any of the Fed's policies to have a large impact on climate change, they need to go hard. They need to make industry squeal. And that raises big questions about the Fed's role.
SKINNER: People say, well, we've got gridlock in Congress, and we have an effective institution that maybe could do something to bring us toward greener equilibriums. And that's really a fundamental question that is about climate change, but it's also about, you know, American democracy.
WOODS: By making the Fed wade into more politicized territory, like choosing which companies to lend to based on their climate credentials, you're making those decisions in a place less bound by politicians and elections, less bound by democracy. You're also risking the very thing that makes the Fed special - its independence. But others argue, in a crisis, maybe the ends justify the means.
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MA: INDICATOR listeners, we want to hear what you think. Should the Fed focus on eliminating climate risks? We have a live poll on Twitter @theindicator, or email us your thoughts at firstname.lastname@example.org.
This episode was produced by Brittany Cronin with help from Alex Drewenskus. It was fact-checked by Taylor Washington. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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