President-elect Joe Biden in Wilmington, Del., Dec. 4.
Photo: Andrew Harnik/Associated Press
When
Barack Obama
clinched the Democratic presidential nomination in June 2008, he said he hoped future generations would look back and say, “This was the moment when the rise of the oceans began to slow and our planet began to heal.”
Not exactly. While the Obama administration helped negotiate the Paris Climate Accords, the effects of those voluntary pledges to reduce greenhouse-gas emissions has been as minimal as their harshest environmentalist critics predicted. According to the Climate Action Tracker site, only two countries—all hail Morocco and Gambia—are living up to their Paris commitments.
As the Biden team confronts what it believes is one of the most urgent policy priorities at home and abroad, it faces an inconvenient truth. Even if Democrats win both runoffs in Georgia and take formal control of the Senate, the administration would have to persuade reluctant lawmakers like West Virginia’s
Joe Manchin
to support the abolition of the filibuster to pass significant climate legislation. Treaty ratification, which requires a two-thirds Senate majority, is out of reach, meaning that no legally binding international climate agreements will be cemented.
Domestically, there is always the presidential pen. While it will take time to reverse Trump-era regulatory decisions in the Environmental Protection Agency, altering the hundreds of regulatory changes and procurement decisions across the government can drive significant change. From tightening standards for methane emissions by frackers to mandating tougher energy standards for everything from buildings to cars, regulators can make it harder and more expensive both to produce and use fossil fuels.
Useful as it remains, however, conventional regulatory pressure is yesterday’s tactic. It is the financial system that drives the allocation of capital, and the considerable power that governments and central banks have over investment decisions is increasingly seen by environmentalists as the key to driving the massive global transformation they seek to address climate change.
The key to this strategy is to define climate change as a risk to the financial system. If rising tides can sink stocks, then the supervisory powers meant to prevent market upheavals can be invoked to impose a green agenda on banks, international financial institutions, hedge funds and other market participants. Regulators can mandate accounting standards that penalize investments and activities they deem bad for the planet, and stock exchanges could require listed companies to conform to whatever standards conventional green wisdom believes useful at any given moment.
Treasury Secretary-designate
Janet Yellen
is a longtime climate hawk. Activists hope she will drive an aggressive use of the department’s wide-ranging regulatory and oversight powers to push the green agenda.
The Fed is also a likely accomplice. By April it is expected to join the 75-member club of central banks focused on climate change, the Network for Greening the Financial System. Last month’s Financial Stability Report cited climate change-based risks to the financial system for the first time. Already the World Bank and the International Monetary Fund seek to drive borrowers toward more “climate friendly” policies. Combined European and U.S. pressure will likely make both institutions dramatically more active in this field.
Prudential regulation of financial markets is the most powerful and the most essential tool in the possession of the administrative state. If the green movement manages a friendly takeover of this system, the effects on investor and corporate behavior could be immense.
The consequences will also be unpredictable—and many will inevitably be perverse. Regulating the world’s complex and ever-evolving financial markets is as difficult as it is critical. Adding an extra layer of requirements, even if justifiable on climate-policy grounds, can make it impossible for finance ministers and central bankers to fulfill their essential roles. Not only will climate activists promote mandates with grave and poorly understood economic consequences; special interests will seize a golden opportunity to entrench subsidies and biases into the heart of the financial system.
It is not only climate activists who look on financial regulation as their Holy Grail. Deploying the vast powers of central banks and finance ministries to engineer social change is emerging as a primary goal for activists of all kinds. While the climate-change movement is best-placed to achieve quick results, other social movements will follow eagerly.
Massive waves of social regulation proliferating through the world’s financial markets may, in the short term, satisfy activists and allow politicians to bask in their approval. But decades of climate policy failure suggest a new wave of climate-based global financial regulation will most likely do more to slow global growth than the sea’s rise.
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