The Role of Central Banks in Facing Climate Change and Enhancing Green Transition

Document Type : Original Article

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Macro-Economic Policies Center- Institute of National Planning (INP)- Cairo- Egypt

Abstract

Climate change and the related risks may negatively affect price stability and threaten the financial stability that central banks target. Moreover, policy actions undertaken to achieve a green transition may imply additional risks for financial and macroeconomic stability. To maintain prices and financial stability, central banks need to consider and assess the potential impact of these risks. In addition, they can play, using their multiple tools, an active role in encouraging financial institutions to finance the targeted green investments and enhance the green transition. This study aims to analyze the role that central banks can play, using their diversified tools and given their mandate, to face these risks and enhance the green transition, as well as discuss the different challenges they face in this respect. The study concludes that central banks possess multiple tools that can be used to face the negative impacts of climate change as well as enhance the green transition. The permissible role the central banks can play in enhancing the green transition is determined by their mandates. This role’s features and dimensions must be carefully determined to avoid conflicting objectives and overburdening central banks with excessive responsibilities that may affect their mission to maintain price and financial stability.

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