Walking a Tightrope: Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy

Abstract

As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.