Ernst Hobma: Remove climate policy from the political arena

October 1, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Ernst Hobma, Economic Researcher at Triodos Investment Management

Climate policy, like monetary policy, creates tension between the short and long term. So perhaps climate policy, like monetary policy, is better off outside the political arena.

The ECB creates monetary policy that affects all of us in the stock market and it does so independently of democratically elected governments. Monetary policy has been placed outside the control of governments because it creates tensions between short- and long-term goals. We consider focusing on short-term electoral gain too tempting for politicians who would like to be re-elected and could abuse monetary policy for this agenda. Climate change – like inflation – causes long-term damage, while tackling it causes friction in the short term. According to this logic, climate policy is better suited to an authority that pursues long-term interests outside politics. For example the ECB.

This story starts with monetary policy, which in most major democracies is implemented (technocratically) by a central bank with a mandate. Central banks have not been independent of governments for very long. For example, the Federal Reserve (Fed) became independent in 1951, but the Bank of England only in 1997. The ECB was established as an independent central bank in the Maastricht Treaty (1992).

The reason for mandating central banks independently of governments is mainly theoretically substantiated. Put positively, the reason is that this makes future price stability more credible. Put negatively, we do not trust that politicians will sufficiently guarantee the long-term priority (price stability) if they are helped electorally in the short term with stimulating policies that give voters jobs and incomes in the short term, but in the longer term actually fuel inflation.

This independent monetary policy made it possible for the ECB to purchase roughly 3,400 billion euros - that is more than three times the Dutch GDP - in bonds in 2022 without any European head of government having any say in the matter. The idea that central banks should be able to do their work independently of governments is widely supported. This is evident, for example, from the negative reactions of the FT or Economist to Donald Trump's comments about the Fed's policy.

Now on to climate policy. It is clear that there are major long-term adverse consequences of emitting greenhouse gases. Almost all government leaders also endorse this importance, as the Paris Climate Agreement proves. More importantly, climate scientists, as evidenced by the IPCC, agree on this more or less unanimously – and scientists rarely do.

Yet collective policy lags far behind the necessary measures. Current policy probably leads to almost 3 degrees of warming, much more than the ambition to limit warming to 1.5 degrees at most. This is easy to explain if you assume that elected governments regularly sacrifice the long term for short-term electoral success. There is a lot of transition pain in dismantling the unsustainable parts of our society and building more equal, more sustainable economies. A politician who is thinking about his next election is happy to avoid such a challenge.

There is therefore a large gap between what we objectively and almost unanimously consider necessary for the long term and what we ourselves achieve on the basis of our four-yearly election cycle. Just like with monetary policy. We would therefore do well to tie our own hands here too.

This can be done by mandating a central bank, which could, for example, determine how much money can still be created for which industries and thus organize a phase-out. This type of policy is called credit guidance and was quite common between 1945 and 1980 as an instrument to guide the development of an economy. We know central banks can do this – what are we waiting for?