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A Central Bank for the Environment?

January 26, 2012

I enjoyed this IPS article on the triumph of environmental ideas and failure of democracies.  It points out the challenge of adopting long-term policies when we have the short-term political interests inherent in democracies.  (After all, regular elections are considered a core element of good governance.)

So how might we overcome this structural problem?   Here’s an excerpt:

But how likely is it that leaders capable of standing up to political and economic interests in order to guarantee humanity’s survival will emerge?

It will probably be necessary to come up with new mechanisms for approving policies with a long-term focus, which are required to solve environmental problems.

There is a disproportionate imbalance of power in favour of the economy. Central banks, for example, have the autonomy to adopt often unpopular monetary measures in many countries, even despite pressure from national governments.

The writer, Mario Osava, makes an excellent point.  We may need somewhat ‘un-democractic’ mechanisms to properly manage our environment.  It makes sense.  We have autonomous Central Banks become financial systems stability is an essential need of society.  We have a rather undemocratic Supreme Court as an objective justice system requires our highest judges to be politically insulated.

So, if environmental sustainability is indeed a core value of society, why not a central bank for natural capital?   We could call it the ‘Federal Environmental Reserve’ and set it up with a mandate to re-orient our economy for sustainability.  For example, why not mandate that the FER transition our economy to clean energy and give it power over energy standards.  Our initial benchmark could be the pace and status of other leading developed countries, like Germany.  Alternatively, you could allow the FER to add an additional premium to the Federal Funds Rate to raise money for investment in ecosystems services, give it power to reduce federal subsidies for dirty industries, or put in charge of greening national accounts.

You may find such an institution fanciful, but I imagine that one day such management will be commonplace.  The evolving work on ecosystem services valuation will make this possible, and our need is ever growing.  If you remember, the idea of a central bank was once quite controversial until financial crises in the 19th and 20th centuries led to the widespread establishment of these institutions.  It may well be that the growing ecological crisis will play a similar catalytic role.

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