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The climate caused by the COVID-19 pandemic replaced the headlines, but did little to prevent it. Last month, warming the Indian oceans encouraged swarms of locusts to jump from eastern Africa to South Asia. A cloud of dust moved from the Sahara desert to the Americas. The wildfires broke out in the meltdown of The Siberian permafrost. This global crisis, such as that caused by the new coronavirus, but more permanently, threatens to surprise the global monetary system. The consequences of climate replacement can cause confusion in the banking and insurance sectors, while causing the electricity sector and, combined, create an unprecedented monetary crisis.
But before the pandemic of tangled economies, an organization of global central banks and Monetary regulators led by Europe had agreed on tactics to manage the dangers posed by global warming. Since then, these banks and regulators have been forced to take emergency measures to deal with the pandemic, so they have largely ignored, abandoned or delayed many of their own prescriptions. Instead, they are now supporting the coal, oil and fuel industries that ultimately threaten the monetary formula by accelerating climate change.
In Europe, as in the United States, where central banks and monetary regulators have not incorporated climate replacement into their decision-making, the bailout is making its way to distressed, underrudented and less successful fossil fuel companies. Not only is allowing investment in fossil fuels a bad public policy, but it makes no economic sense. The world’s major central banks will have to temporarily oppose this trend and restrict investment in the fossil fuel industry to avoid further expansion of the systemic threat that the climate replaces poses to the monetary system.
Between 2013 and 2020, the Bank of England became the first central bank to plan the economic effects of global warming. Climate change, the bank determined, threatened the economy not only through the physical consequences of escalating storms, floods and droughts, but also through mandatory transition prices away from fossil fuels, and perhaps by provoking legal action on the component of the affected components. In 2017, the bank’s governor, Mark Carney, began to warn of a climate-related “Minsky moment,” a sudden cave in the market caused by reckless speculative activity, which would threaten the foundations of the monetary system.
Along with seven other central banks, adding those from China, France, Germany and the Netherlands, the Bank of England established a network of like-minded establishments in late 2017 committed to “greening the monetary system.” Today, the Financial System Greening Network contains more than 60 central banks and monetary supervisors, which account for more than 50% of global GDP and are committed to ensuring that money markets are well prepared for climate risks.
Carney has put the Bank of England at the forefront of policy-making in this area. He designed the first stress control to quantify the most likely effects of climate replacement in the monetary establishments he oversees. The effects recommend that the coal industry be affected, wasting 65% of its monetary price in a “sudden replacement” scenario. The oil industry has not done much better, with a 42% relief in its monetary price in the same scenario. These industries have been greatly affected because the transition from fossil fuels will result in drastic discounts on the price of these companies’ assets, blocking billions of dollars in invested capital.
These projections have encouraged the Bank of England to filter out its own investments to restrict or eliminate purchases by coal, oil and fuel corporations. In fact, Andrew Bailey, Carney’s successor, felt that aligning the bank’s portfolio with the purpose of reducing carbon emissions made “perfect sense.” Other central banks seemed to be able to adapt. Christine Lagarde, president of the European Central Bank, is committed to eliminating the bank’s high-carbon assets. Sweden’s Riksbank was extra in promoting government bonds such as Australia, which were highly exposed to high-carbon industries. Taken together, these movements pointed to markets that fossil fuel corporations were bearing significant monetary hazards and that central banks sought to involve them.
In the other aspect of the pond, however, U.S. monetary regulators were less convinced. The influence of the administration of the US pre-specative Donald Trump has prevented the Fed from officially adjusting to a member of the network built by Carney. Unlike its global peers, the Fed did not conduct any stress tests and did not promise to liquidate purchases through coal, oil, and fuel corporations, even when U.S. fossil fuel corporations had become highly vulnerable. A decade of low interest rates and simple loans has encouraged U.S. corporations to grow through loans. In early 2020, the U.S. oil and fuel industry, for example, had a remarkable debt of more than $700 billion, according to the Institute for Economic and Financial Analysis of Energy. But the industry’s contribution to U.S. corporate profits. It had declined even when its debt point so skyrocketed, so the oil industry now accounts for only 4% of the S-P 500, up from 25% in 1980.
When the pandemic and the resulting monetary crisis hit, debt markets, of which fossil fuel corporations had ended up relying on, took hold. Investors are wary of loans in a non-performing economic environment, and corporations can no longer borrow to finance their operations. The once undeniable task of issuing or renewing a debt has suddenly become a matter of life and monetary death. The oil industry moved overnight, between negative costs in April and a massive drop in global demand. The coal industry suffered a similar blow from relief in the call for electricity for the pandemic, which disproportionately harms the industry because its operating costs are higher than those of many other power bureaucracies. State and federal regulations that favor renewable energy over coal are also affecting the industry, and analysts now predict that coal will produce only 10% of U.S. electricity. Until 2024, up from 50% a decade earlier.
The overall financial crisis forced central banks around the world to leap into action to protect their national economies from a tide of pending bankruptcies. But bailouts have been fairly indiscriminate, driving financial support to many sectors, including the very same coal, oil, and gas industries upon which central banks had cast doubt. Not only have financial regulators supported fossil fuel companies with new investments but they have also, at least temporarily, abandoned their attempts to address the long-term climate risks that those investments create.
The Bank of England postponed its stress tests and its efforts to redirect investments away from high-carbon-producing industries. The European Central Bank, which had followed the Bank of England’s lead before the crisis, similarly delayed its climate policy review. Worse, the ECB’s first wave of asset purchases between the middle of March and the middle of May drove 7.6 billion euros directly to fossil fuel companies. The same financially risky assets that so worried these central banks before the crisis—coal, oil, and gas—are now rapidly arriving on their balance sheets.
U.S. fossil fuel companies, abetted by Republican allies in Congress and by Trump himself, pressured the Fed to ease credit requirements that constrained the purchase of junk debt (much of the debt of fossil fuel companies is considered high risk and well below investment grade). The Fed did relax investment criteria through a program called the Main Street Lending Program, which allowed indebted companies to service their debts with government-backed loans, despite the alarm of congressional watchdogs. At the same time, the coal industry raided other emergency relief measures such as the Paycheck Protection Program, meant to support small and medium-sized businesses. On average, the industries that accepted these PPP funds used them to cover 52 percent of payroll costs; the coal industry, however, successfully secured funds to cover 72 percent of payroll costs.
In addition, two new programs announced in March allowed the Fed, for the first time ever, to buy corporate debt (historically it has bought only government debt and mortgages), opening the door to direct purchases of the bonds of coal, oil, and gas companies. While the government has directed only a fraction of available money into the market, Influence Map, a London-based economic think tank, has revealed that just one of these programs has driven nearly $100 million to fossil fuel companies. If the program continues without any further restrictions, it could channel $19 billion to fossil fuels. Fossil fuel companies in the United States are likely to spend a good portion of the bailout funds they receive on servicing their own debts, not on hiring new workers—and potentially not even on preventing layoffs.
Financial bailouts will make the coal, oil and fuel industries more sustainable. On the contrary, these corporations will remain at the breaking point of death, burdened with debt. By supporting them, central banks forget the same monetary recommendation they themselves have presented to others for years. In addition, they send the message to investors that Hing is too suspicious to rescue in times of crisis, even in the fossil fuel industry.
Financial regulators still have time to move in a broader direction. In Europe, Lagarde has once again committed to a climate policy review that is expected to end in mid-next year, in time for the upcoming primary summit on foreign climate in Glasgow. Civil society teams have asked him to keep his past promises. Their leadership may inspire other central banks to start reducing investments in fossil fuels.
In the United States, however, Republican leaders seem determined to rescue the fossil fuel industry (they have said it publicly). But a Democratic administration, if someone came to power, can invoke the Dodd-Frank Act without seeking congressional approval, allowing the president to restrict monetary flows to coal, oil, and fuel companies.
Ultimately, regulators can how they need to boost their savings. The existing path for many central banks that are too aware of the threat posed by climate conditions to their monetary systems is to send billions of dollars from taxpayers to fossil fuel corporations. If not reversed, the debts of these corporations will appear on public and personal balance sheets as time bombs, embodying the same threat that central banks have been wary of for years.
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