Central banks from eight countries—Mexico, the UK, France, Netherlands, Germany, Sweden, Singapore, and China—formed the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in 2017 to investigate and coordinate a response to climate change. By the end of 2022, the NGFS had over 120 members. However, among these central banks, there were considerable differences in the strategies adopted to account for and address climate change. Most strikingly, climate change has emerged as an unusual area of divergence between the European Central Bank (ECB) and the U.S. Federal Reserve (Fed), despite their historical tendency to adopt similar policy tools, frameworks, and objectives. The Fed limited its approach to climate change to basic climate policy standards or “norms” that recognized some relevance of climate change to achieving its monetary and prudential objectives but avoided any support for decarbonization. In contrast, the ECB better appreciated that climate change raised profound challenges for achieving its central banking objectives. As a result, the ECB adopted proactive climate policy norms that, for example, put in place climate-related criteria for asset purchase programs and far-reaching supervisory interventions to ensure that financial institutions accounted for climate risk.
To understand the ECB-Fed divergence on climate policy, we develop a theoretical framework that describes how new central banking norms are created and become influential in the context of domestic and international pressures. In the initial stage of climate policy norm emergence, broad support across the EU for climate action along with persuasive think tanks, researchers, and other policy entrepreneurs helped push the ECB to endorse new climate-related norms. The founding of the NGFS and the associated cascade of climate-related norms exerted significant pressure towards climate policy convergence across many central banks. However, the deeply polarized and partisan U.S. debate on climate change, stoked by an influential domestic fossil fuel industry, led the Fed to adopt only a modest version of the foundational climate norms—a stark divergence from the proactive climate stance of the ECB.
Given the deep differences in domestic political pressures, it seems unlikely that the climate policy differences between the ECB and the Fed will soon disappear. However, given the international connectedness of central banking, we expect global policy norms to provide sustained pressure towards convergence. In this context, the ECB might scale back some proactive commitments, although it seems unlikely to entirely disavow its current forward-leaning stance. The Fed may also seek a more favorable compromise, such as assuring domestic audiences of climate policy restraint, while cooperating with international peers on less overt regulatory interventions.
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Acknowledgements and disclosures
Acknowledgments: Authors would like to thank Michael Bauer, Stefan Eich, Ilene Grabel, Aaron James, Galina Hale, Eric Helleiner, Kate McNamara, Saule Omarova, Francesco Paolo Mongelli, and David Wessel for helpful comments.
Disclosures: Jens van ’t Klooster received funding from the Dutch Research Council (NWO) under grant 406.18.FT.014. Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. The authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
