As concerns about climate change burrow deeper into the mainstream of the finance world, a Carnegie Mellon University professor says one way the Federal Reserve can take up the challenge is by adopting a “green interest rate.”
In a paper released in June, Nick Muller notes that environmental harm comes with economic costs.
“Pollution damage — whether we’re talking about air pollution or greenhouse gases or other things — affects [economic] growth through things like premature mortality and health costs [as well as] property damage,” Muller said.
His paper argues that the Fed could help to manage such impacts by adding environmental stability to its formula for calculating interest rates. Today, the Fed’s “dual mandate” consists of maximizing employment while keeping inflation in check.
If it were to prioritize the environment, too, Muller said, interest rates would also reflect expectations about the government’s approach to environmental policy: The cost of borrowing would go up if policymakers show signs they will implement pollution controls, and fall if such protections are not anticipated.