Want to Save the Climate? Break Up the Big Banks.

Oscar Reyes October 30, 2018

(Maxim Blinkov/shutterstock.com)

A stark new Unit­ed Nations cli­mate report warns that humans have about 12 years to slash glob­al emis­sions by near­ly half. Unfor­tu­nate­ly, that’s going to be extreme­ly chal­leng­ing with deep changes to the glob­al finan­cial system.

Despite reg­u­lar­ly claim­ing new com­mit­ments to green finance,” the big banks con­tin­ue to lend bil­lions to the fos­sil fuel indus­try every year — includ­ing for the most extreme cli­mate-dam­ag­ing activ­i­ties, like exploit­ing tar sands oils and burn­ing coal.

Con­tin­u­ing to invest in fos­sil fuels goes against all of the evi­dence about what needs to be done to tack­le cli­mate change. An esti­mat­ed 80 per­cent or more of the world’s known fos­sil fuel reserves need to remain in the ground if we’re to have any chance of avoid­ing cat­a­stroph­ic con­se­quences, like ris­ing sea lev­els and melt­ing glaciers.

In place of fos­sil fuel finance, invest­ments should be redi­rect­ed toward renew­able ener­gy, clean­er indus­try, and more sus­tain­able agri­cul­ture, among oth­er pri­or­i­ties. That requires reforms to the Fed and the breakup of the biggest banks.

The scale of this change can seem daunt­ing. But in a new report for the Insti­tute for Pol­i­cy Stud­ies, I’ve iden­ti­fied sev­er­al pri­or­i­ties for achiev­ing a more cli­mate-friend­ly finan­cial system.

Reform the Fed

The finan­cial cri­sis laid bare the short­com­ings of a sys­tem that was obsessed with price sta­bil­i­ty” above all oth­er fac­tors. Since then, many cen­tral banks have revised their man­date to include the sta­bil­i­ty of the finan­cial sys­tem as a whole. Some cen­tral bank lead­ers already inter­pret this to include broad­er social and envi­ron­men­tal objec­tives, and it’s time for the Fed to step up and do the same. 

Increase trans­paren­cy

Mark Car­ney, gov­er­nor of the Bank of Eng­land, has repeat­ed­ly empha­sized greater trans­paren­cy on the poten­tial impacts of cli­mate change on the economy.

More fre­quent extreme weath­er events, such as Hur­ri­cane Flo­rence or the past summer’s Cal­i­for­nia wild­fires, could have big impacts on prop­er­ty, trade and insur­ance pre­mi­ums. Com­pa­nies should be clear about how their busi­ness mod­el would be affect­ed by the tran­si­tion to a clean­er econ­o­my. The inter­na­tion­al Finan­cial Sta­bil­i­ty Board, estab­lished in response to the finan­cial cri­sis, has sug­gest­ed new glob­al rules on cli­mate trans­paren­cy, which would be a good start.

Pro­mote clear guidelines

In Chi­na, mean­while, an inter­ven­tion­ist cen­tral bank has played a key role in pro­mot­ing green bank­ing guide­lines that pri­or­i­tize loans for renew­able ener­gy and more effi­cient indus­try. The Fed should fol­low, while seek­ing to improve upon the patchy record of the People’s Bank of Chi­na in imple­ment­ing its own policies

More rad­i­cal­ly, banks should impose a cred­it ceil­ing” on fos­sil fuel invest­ment, with a clear time­line for reduc­ing this lim­it to zero. If the oil needs to stay in the ground, the mon­ey to extract it needs to stay in the vault.

Take lessons from abroad

From Bangladesh to Cos­ta Rica, there are many instances of state-owned banks and finan­cial insti­tu­tions lead­ing the way in clean ener­gy invest­ments. In Bangladesh, for exam­ple, a gov­ern­ment-backed lend­ing pro­gram, sup­port­ed by grants and soft loans from mul­ti­lat­er­al agen­cies, has helped to install more than 3 mil­lion solar home sys­tems in rur­al areas in lit­tle more than a decade as part of a rent-to-own” scheme.

Oth­er changes will need to come from the ground up, includ­ing through the re-emer­gence of local sav­ings banks and coop­er­a­tives. In Ger­many, for exam­ple, local sav­ings banks have suc­cess­ful­ly tar­get­ed renew­able ener­gy and effi­cien­cy pro­grams in their own com­mu­ni­ties, as well as part­nered with the country’s pub­licly owned devel­op­ment bank to ensure that its ener­gy-lend­ing is local­ly account­able. The rise of these small­er insti­tu­tions, which are often non-prof­it and which some­times have a social mis­sion to serve dis­ad­van­taged com­mu­ni­ties, can also help turn the tide on the cor­ro­sive Wall Street cul­ture that fed into the finan­cial crisis.

Such changes are only like­ly to be achieved if there is a rad­i­cal shake up in how bank­ing works. Break­ing up the too big to fail” banks would be the most effec­tive way to weak­en the lob­by­ing pow­er of finan­cial insti­tu­tions with a vest­ed inter­est in remain­ing the sta­tus quo. This would have not only cli­mate ben­e­fits, but would also make for a more sta­ble finan­cial system.

Our econ­o­my — and our plan­et — depends on it.

In These Times pub­lished this arti­cle in part­ner­ship with For­eign Pol­i­cy In Focus.

Oscar Reyes is an asso­ciate fel­low at the Insti­tute for Pol­i­cy Stud­ies and an expert in cli­mate finance.
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