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Managing Climate Change Risk: The Policy Options for Central Banks

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  • Ozili, Peterson K

Abstract

This article discusses some policy options that central banks may find useful in dealing with climate change risk in the financial sector. The effect of climate change on the financial sector are indirect but severe when they occur. Central banks play an important role in regulating the financial sector and in managing its inherent risks, yet there are no studies that suggest policy solutions to help central banks and other financial sector regulators deal with the risk that climate change pose to the financial sector. Five policy options are proposed in the paper, which includes: imposing a climate change capital surcharge; impose a fixed-rate risk capital - based on Tier 2 capital; a reduction in lending to industries whose activities destroy the environment and climate; creating a climate bank; and, requiring financial institutions to relocate their important assets to areas less prone to climate change events. Several policy experiments are needed to identify the best policy option that works best for each country while taking into account the unique financial sector, financial system and climate change history of each country

Suggested Citation

  • Ozili, Peterson K, 2021. "Managing Climate Change Risk: The Policy Options for Central Banks," MPRA Paper 111217, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:111217
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    File URL: https://mpra.ub.uni-muenchen.de/111217/1/MPRA_paper_111217.pdf
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    References listed on IDEAS

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    6. James,Harold, 2020. "Making a Modern Central Bank," Cambridge Books, Cambridge University Press, number 9781108799492, January.
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    8. World Bank, "undated". "Europe and Central Asia Economic Update, Spring 2020," World Bank Publications - Reports 33476, The World Bank Group.
    9. Ozili, Peterson K, 2020. "Effect of climate change on financial institutions and the financial system," MPRA Paper 103317, University Library of Munich, Germany.
    10. Goodhart, C. A. E., 2011. "The changing role of central banks," Financial History Review, Cambridge University Press, vol. 18(2), pages 135-154, August.
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    Cited by:

    1. Radu Șimandan & Cristian Păun, 2021. "The Costs and Trade-Offs of Green Central Banking: A Framework for Analysis," Energies, MDPI, vol. 14(16), pages 1-25, August.
    2. Iulia Lupu & Adina Criste & Tudor Ciumara & Camelia Milea & Radu Lupu, 2024. "Addressing the Renewable Energy Challenges through the Lens of Monetary Policy—Insights from the Literature," Energies, MDPI, vol. 17(19), pages 1-31, September.

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    More about this item

    Keywords

    climate change; financial risk; financial institutions; central bank; financial system; financial sector; banks; capital surcharge; climate change risk; climate bank; bank regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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