Janet Yellen's 2014 To-Do List: Climate Change
On January 6, Janet Yellen will likely be confirmed as the next Chair of the Federal Reserve System. Her to-do list will be full of things like the interest rate, the bank bailouts, the unemployment rate, and in general, running the economy. Climate change would be an unexpected addition to that list, but the Fed Chair is in an important and rarely recognized position to to take action on the climate crisis.
Why would a central banker need to worry about climate change? Sure, more extreme weather events are expected to cause problems with the country's built infrastructure. Sure, a changing climate will cause major disruptions to the agricultural sector. Sure, if current trends continue, overall damages could overwhelm GDP growth. Those issues are all important, but even bigger is how Janet Yellen, as chief monetary policymaker, can reorient the economy using the power of money creation to address climate change.
In the silos of the Federal Government, domestic efforts to address climate change are typically led by an alphabet soup of environmental agencies including the EPA, DOE, CEQ and others, but not the Federal Reserve (aka "The Fed"). Although President Obama has stated his intention to implement his climate action plan without Congressional approval, there are limits to presidential authority. He cannot institute an economy-wide price on carbon, and he cannot circumvent Congress' power over the budget.
Meanwhile, a major unrecognized power sits in another corner of the policy apparatus. While the Federal Reserve plays an important role in regulating the country's banks, setting the interest rate that banks pay, and determining the level of money supply, it also has the unique ability to reorient the interaction between the economy and environmental degradation by controlling the power and process of money creation.
In our debt-based monetary system, money enters the economy when banks make loans. Those loans must be repaid with interest, leading to an economy-wide growth imperative accompanied by the "side effect" of global warming. A more sustainable approach would be a steady state economy, where people can achieve a comfortable standard of living without jeopardizing the planet's life-support systems.
Incoming Chair Yellen can take steps to de-link economic growth from increased carbon emissions in several ways. She can include carbon emissions as an indicator necessary for national prosperity. She can make a carbon cap a part of the Fed's operations by tracking and requiring carbon reductions in the footprint of loans originated by Fed member banks. This could take the form of a declining number of annual allowances to banks that provide loans to the energy and oil industry. By connecting economic activity to greenhouse gas emissions, the Federal Reserve could create levers to allow for additional economic growth in low-carbon activities, while reining in high-carbon industries. Simply making the proposal would be beneficial as it would doubtless send shockwaves through the banking community, and provide a needed wake-up call to the financiers of the current "carbon bubble."
Perhaps most importantly, she can harness the unique power of money creation to help people through the transition to a low-carbon economy. A long-term, systemic solution to climate change must have broad popular support by spreading the benefits as widely as possible. One way to do this would be for Chair Yellen to transition the next phase of quantitative easing (QE) into a citizen's dividend. QE was begun under outgoing Fed Chair Ben Bernanke as a strategy to prop up the banking sector by purchasing bank assets, mainly Treasury Notes or Mortgage Backed Securities. With citizen's dividends instead of a bank-oriented stimulus, Chair Yellen could focus on stimulating the real economy by sending money to actual people who will spend it into circulation and create the demand so that employers will begin hiring again. To address concerns that the Fed lacks the authority to send out such a dividend, the Fed could collaborate with the Treasury to implement this as part of a pass-through when it purchases Treasury bonds.
Chair Yellen's citizen's dividend for economic stimulus would help build public acceptance toward populist solutions to other issues involving the Commons such as climate change. The Fed's creation of a citizen's dividend could provide a boost to proposals for Congress to institute a carbon price that returns revenues to the people as a climate dividend representing each person's equal per capita share under an economy-wide upstream cap on greenhouse gas emissions.
The new Fed Chair can be a climate player internationally as well. Chair Yellen could attend the next United Nations Climate Conference in Lima, Peru, in December 2014. The Chair of the Federal Reserve would be an unusual stakeholder at a UN climate conference. Talks about an international climate treaty are normally led by a delegation of State Department negotiators, not by the Fed. Yet with each passing year since the United Nations Framework Convention on Climate Change (UNFCCC) process began 20 years ago, carbon emissions have increased, recently passing 400 parts per million in the atmosphere. Meanwhile, government representatives at the UN conferences have focused on "managing expectations" (downward), refusing to take financial responsibility for historical emissions, and claiming helplessness given a weak economy and a divided or hostile Congress. The best the UN process has accomplished thus far was the 1997 Kyoto Protocol, which mostly served as a placeholder until something better could be put in place. The 2008 Copenhagen conference failed to follow up. Now delegates are looking for a savior to materialize before a pivotal UN Climate Conference in Paris scheduled for December 2015. Given his reluctance to take an ambitious climate treaty to Congress, it is doubtful that President Obama will be that savior. Something has to change.
The Chair of the Federal Reserve is in a unique place to change the dynamic of the climate change issue. As a central banker, she can act unilaterally without congressional approval. For example, the UN proposal for a Green Citizen's Bank, which is meant to provide $100 billion to assist countries impacted by climate change, could quickly become a reality with leadership from Chair Yellen and her global peers. It would shock the climate delegates accustomed to gridlock and indecision to see a decision maker with the Fed's resources at a UN climate conference.
Yellen can arrive in Peru with a policy package consisting of:
- Proposing that the U.S. citizen's dividend be expanded globally, perhaps following the Cap & Share model
- Setting a global cap on high-carbon economic growth by regulating the type of bank loans mentioned above
- An agreement among the world's central bankers to begin implementing Contraction & Convergence toward per capita equity in greenhouse gas emissions. The Contraction & Convergence framework would provide for an equitable distribution of the world's remaining carbon budget.
The Federal Reserve, now in its 100th year, faces more scrutiny and criticism than ever before. Some of that criticism is well-deserved. The Fed has lacked transparency to the public and usually makes policy that benefits Wall Street and the moneyed elite. Janet Yellen is a veteran in the Federal Reserve System, including most recently serving under Bernanke as Vice Chair. Yet she also represents a new era as the first female U.S. central banker. Janet Yellen will have unique powers over economic policy, and she can use her new powers to save the planet. To do so, she will need to add one more item to her 2014 to-do list.
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