The Coronavirus pandemic, and the measures to contain it, had far reaching consequences on economic activities, which also led to a sharp fall in CO2 emissions. This has sparked new debate about how the recovery from the crisis could be made compatible with the Paris climate goals.
In this Bank Underground opinion piece, Misa Tanaka from the Bank of England’s Research Hub, surveys the emerging literature on the link between the economic recovery from the pandemic and climate change. She finds that there is a growing consensus among many central banks that they should factor in climate-related financial risks in their operations, and substantial progress has been made in this direction in recent years. Nevertheless, central banks’ responses to Covid-19 crisis attracted renewed calls that their policies should also be calibrated to help support climate goals. The existing literature, however, cautions that most central banks do not have a mandate to engineer a low-carbon transition, and thus the tools at their disposal may not best suited for this purpose.
Tanaka concludes that any role of central banks in supporting a green recovery will need to be defined within an overall policy strategy to engineer a low-carbon transition.