Walking the Tightrope: Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy

Journal of Financial Regulation, vol. 8, No. 2, pp. 203-229, 2022

27 Pages Posted: 6 Oct 2022

See all articles by Dimitri G. Demekas

Dimitri G. Demekas

School of Public Policy, LSE; International Finance Corporation, World Bank Group

Pierpaolo Grippa

International Monetary Fund (IMF) - Monetary and Capital Markets Department

Date Written: August 24, 2022

Abstract

As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.

Keywords: financial stability, financial regulation, climate change, climate mitigation policy, low carbon economy, energy transition

JEL Classification: E58, G28, Q54, Q58

Suggested Citation

Demekas, Dimitri G. and Grippa, Pierpaolo, Walking the Tightrope: Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy (August 24, 2022). Journal of Financial Regulation, vol. 8, No. 2, pp. 203-229, 2022, Available at SSRN: https://ssrn.com/abstract=4221987 or http://dx.doi.org/10.2139/ssrn.4221987

Dimitri G. Demekas (Contact Author)

School of Public Policy, LSE ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

International Finance Corporation, World Bank Group

1818 H Street NW
Washington, DC 20433
United States

Pierpaolo Grippa

International Monetary Fund (IMF) - Monetary and Capital Markets Department ( email )

700 19th St NW
Washington, DC 20431
United States

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