Climate Change and the Bank of Korea

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Climate Change and the Bank of Korea

1. International Response to Climate Change

Growing Pressure on the International Community

Recognizing the severity of climate change, the international community adopted the Paris Climate Agreement in December 2015, aiming to keep the global temperature increase well below 2℃ above pre-industrial levels (1850-1900) and striving to limit it to 1.5℃. The IPCC’s 2018 report, "Global Warming of 1.5℃," provided evidence that to keep the temperature rise below 1.5℃, global greenhouse gas emissions must be cut by over 45% from 2010 levels by 2030, with carbon neutrality achieved by 2050.

Progress in Major International Climate Change Discussions

1992 기후변화 관련 최초의 국제협약 un 기후 변화협약 (unfccc) 채택 / 1997 온실가스 감축 의무 최초 규정 교토의정서 채택 / 2014 온난화 2℃ 억제 IPCC 보고서 / 2018 1.5℃의 경고 IPCC 보고서 / 2021.8월 1.5℃ 도달 시점 단축 IPCC 보고서 / 2023 글로벌 지속가능성 공시표준 ISSB 지속가능성 공시기준
1992 기후변화 관련 최초의 국제협약 un 기후 변화협약 (unfccc) 채택 / 1997 온실가스 감축 의무 최초 규정 교토의정서 채택 / 2014 온난화 2℃ 억제 IPCC 보고서 / 2018 1.5℃의 경고 IPCC 보고서 / 2021.8월 1.5℃ 도달 시점 단축 IPCC 보고서 / 2023 글로벌 지속가능성 공시표준 ISSB 지속가능성 공시기준
세계 주요국 ndc 사례 미국, EU, 일본, 영국

National Greenhouse Gas Reduction Targets of Major Countries

Major countries like the U.S., the European Union, and Japan have set plans to achieve carbon neutrality (Net Zero Emissions) by 2050. As an intermediate goal, they have established Nationally Determined Contributions (NDCs) to reduce greenhouse gas emissions by 40%-55% from their baseline years by 2030, and are gradually intensifying their efforts. Following this trend, the Korean government declared its "2050 Carbon Neutrality" goal in 2020, and in 2021 raised its NDCs target, committing to a 40% reduction from 2018 levels by 2030, lowering emissions from 727.6 million tons in 2018 to 436.6 million tons by 2030.

New Strategies in Major Countries

Major economies, as seen in the U.S.'s Inflation Reduction Act (IRA) and the EU's Green Deal industrial plan, are using climate action and energy transition to boost industrial competitiveness.

미국
  • Reduction Goal: Net-zero emissions by 2050, with a 50%-52% cut below 2005 levels by 2030.
  • Inflation Reduction Act: Allocates $369 billion for climate action (2022).
유럽연합
  • Reduction Goal: Achieve climate neutrality by 2050 and reduce emissions by 55% below 1990 levels by 2030.
  • Carbon Border Adjustment Tax: Full implementation of emission regulations for six key products, including steel, by 2026.
  • RePowerEU: Reducing energy use, diversifying supply chains, and expanding renewables (May 2022).
영국
  • Reduction Goal: Achieve climate neutrality by 2050 and cut emissions by 68% from 1990 levels by 2030.
  • Nuclear Power Expansion: Plans to build up to eight additional reactors by 2050 for energy security (2022).
일본
  • Reduction Goal: Achieve climate neutrality by 2050 and cut emissions by 46% from 2013 levels by 2030.
한국
  • Reduction Goal: Achieve climate neutrality by 2050 and cut emissions by 40% from 2018 levels by 2030.
  • Legislation: Framework Act on Carbon Neutrality and Green Growth for Coping with Climate Change (2021).

Progress on Decarbonization

With the EU's Carbon Border Adjustment Mechanism (CBAM) set to begin in January 2026 and increasing global participation in RE100 and ESG management, climate change is becoming a trade barrier, accelerating the shift to a decarbonized economy in major developed countries. This impending international regulation is pressuring Korean export companies and SMEs to urgently adopt low-carbon production across their supply chains.

2. The Central Bank's Role in Climate Action

Cautious Approach

Debate continues over the central bank’s role in social issues like employment, income distribution, and climate, beyond its core mandate of price and financial stability. Cautious proponents argue that addressing specific issues such as climate change would: (1) exceed the central bank's legal authority, (2) threaten its independence, and (3) disrupt market mechanisms, breaching neutrality. Federal Reserve Chair Jerome Powell has recently reaffirmed a conservative view, stating that decisions about policies to address climate change must be made by the elected branches of government.

Supportive Approach

Conversely, supporters argue that: (1) climate risks could impact a central bank’s price and financial stability mandate, (2) underestimating these risks might cause resource allocation imbalances, and (3) central banks' asset purchases may favor high-carbon companies. Thus, they believe central banks should proactively address climate change.

신중론 찬성론 비교
Rationale behind the cautious approach Rationale behind the supportive approach
  • Central banks addressing social issues like climate change may overstep legal boundaries and compromise their independence.
  • If the central bank’s mandates include support for the government’s economic policy, it must address climate change.
  • Climate-related risks are a source of financial risk. It is therefore within the mandates of Central Banks to ensure the financial system is resilient to these risks (NGFS, 2018).
  • Responding to climate change with monetary policy might conflict with central banks’ primary goal of price stability.
  • Supply and demand shocks from climate change and exposures to high-carbon industries could threaten price and financial stability.
  • Climate change, with its 'ambiguity of responsible entities and timeframes,' increases the likelihood of market failure.
  • Central banks' support for green industries contradicts the neutrality of monetary policy.
  • As the private sector underestimates climate risks and thus causes imbalances in allocating financial resources, central banks need to respond to climate risks by altering the loan collateral system and composition of asset purchases (IMF, 2019).
  • Climate change must be factored into the asset purchase policy, which currently favors high-carbon industries.
  • Central banks sometimes need to act as market makers, beyond their role as lenders of last resort, to address risks to financial stability.

Building consensus on climate responses.

Since the mid-to-late 2010s, global central banks have strengthened their climate responses, recognizing climate effects and the transition to carbon neutrality as risks to the financial system.

Transmission channels of climate risks to financial risks (NGFS 2021)

(기후 리스크)물리적 리스크 -점진적 충격 (예 : 기온, 강수, 해수면 상승 등), 급진적 충격 (예 : 폭염, 홍수, 태풍, 산불 등), 이행 리스크 -정책, 규제 -기술발전 -소비자 선호 /[기후-경제 피드백효과] (실물경제 전달 경로) 미시 기업 자산가치 하락, 사업 붕괴 좌초자산과 신규 자본지출 수요 및 비용 구조 변화 적응 실패 시 법적 책임 가계 소득 감소 자산가치 하락, 유지비용 상승 등 / 거시 투자 증가 및 자본 감가상각, 가격 변화(공급 충격), 생산성 변화(적응을 위한 재투자, 위험회피 강화), 이행‧물리적 리스크 관련 노동 시장 마찰, 사회‧경제 구조 변화(소비성향변화, 이민 등), 국제무역, 정부 수입, 재정 여력, 이자율, 환율 등에 대한 충격/ [경제-금융시스템 피드백효과] (금융 리스크) 신용 리스크 기업‧가계 부도 담보 가치 하락 보험 리스크 보험 손실 증가 등 유동성 리스크 유동성 수요 증가 리파이낸싱 리스크 증대 시장 리스크 주식, 채권, 상품 가격 재평가 [금융시스템 전염]운영 리스크 공급망 붕괴 강제적 시설 폐쇄
(기후 리스크)물리적 리스크 -점진적 충격 (예 : 기온, 강수, 해수면 상승 등), 급진적 충격 (예 : 폭염, 홍수, 태풍, 산불 등), 이행 리스크 -정책, 규제 -기술발전 -소비자 선호 /[기후-경제 피드백효과] (실물경제 전달 경로) 미시 기업 자산가치 하락, 사업 붕괴 좌초자산과 신규 자본지출 수요 및 비용 구조 변화 적응 실패 시 법적 책임 가계 소득 감소 자산가치 하락, 유지비용 상승 등 / 거시 투자 증가 및 자본 감가상각, 가격 변화(공급 충격), 생산성 변화(적응을 위한 재투자, 위험회피 강화), 이행‧물리적 리스크 관련 노동 시장 마찰, 사회‧경제 구조 변화(소비성향변화, 이민 등), 국제무역, 정부 수입, 재정 여력, 이자율, 환율 등에 대한 충격/ [경제-금융시스템 피드백효과] (금융 리스크) 신용 리스크 기업‧가계 부도 담보 가치 하락 보험 리스크 보험 손실 증가 등 유동성 리스크 유동성 수요 증가 리파이낸싱 리스크 증대 시장 리스크 주식, 채권, 상품 가격 재평가 [금융시스템 전염]운영 리스크 공급망 붕괴 강제적 시설 폐쇄
Sources: NGFS(2021)

Direction of Central Bank Response in Major Countries

Major central banks are intensifying their efforts to address climate change by focusing on risk assessment, supervisory systems, research, and communication from a financial stability perspective.

Climate change response strategies by major central banks
Climate change response strategies by major central banks
Organization Climate Change Response Strategy
Federal Reserve
  • It is within the Fed’s responsibility to ensure that financial institutions have resilience to clilmate-related risks (report to Senate in March 2021).
ECB
  • The ECB needs to cope with transition toward a low-carbon economy in consideration of the effects of climate change on prices (‘Climate change and the ECB’ at the ECB website).
Bank of England
  • The Bank of England’s approach to climate change is to play a leading role, through our policies and operations, in ensuring the financial system, the macroeconomy, and the Bank of England itself, are resilient to the risks from climate change and supportive of the transition to a net-zero emissions economy (The Bank of England's climate-related financial disclosure 2021).
Reserve Bank of New Zealand
  • The Reserve Bank wants to contribute to the Government’s objective of a sustainable, productive and inclusive economy. (Reserve Bank of New Zealand climate change strategy, 2018)
Sveriges Riksbank
  • Climate change can have severe consequences for the economy. This means that forecast and analysis work in monetary policy needs to take account of climate change.
  • Supporting general economic policies is also a goal of monetary policy.
Magyar Nemzeti Bank
  • Achieving an economy that is also environmentally sustainable is a key objective for central banks, both in terms of price stability and efficient monetary transmission. (MNB’s Sustainability and Central Bank Policy, 2021)
Bank of Japan
  • Supporting the private sector’s efforts on climate change will help stabilize the macroeconomy in the long run. (BOJ’s Financial Policy Decision Meeting, 2021)

Monetary Policy Responses

Major economies still differ on integrating climate change into monetary policy due to potential conflicts with existing mandates. However, around 2020, some central banks, including the ECB, BOE, and BOJ, began doing so. Central banks' monetary policy options for addressing climate change are categorized into credit operations, collateral policies, and asset purchases.

Monetary policy options to address climate change propsed by the NGFS (March 2021)
주요국 중앙은행의 기후변화 대응을 위한 통화정책 운영 현황
Credit operations
(1) Adjust pricing to reflect counterparties’ climate-related lending
  • Make the interest rate for central bank lending facilities conditional on the extent to which a counterparty’s lending (relative to a relevant benchmark) is contributing to climate change mitigation and/or the extent to which they are decarbonising their business model.
(2) Adjust pricing to reflect the composition of pledged collateral
  • Charge a lower (or higher) interest rate to counterparties that pledge a higher proportion of low-carbon (or carbon-intensive) assets as collateral or set up a credit facility (potentially at concessional rates) accessible only against low-carbon assets.
(3) Adjust counterparties’ eligibility
  • Make access to (some) lending facilities conditional on a counterparty’s disclosure of climate-related information or on its carbon-intensive/low-carbon/green investments.
Collateral
(4) Adjust haircuts
  • Adjust haircuts to better account for climate-related risks.
  • Haircuts could also be calibrated such that they go beyond what might be required from a purely risk mitigation perspective in order to incentivise the market for sustainable assets.
(5) Negative screening
  • Exclude otherwise eligible collateral assets, based on their issuer-level climate-related risk profile for debt securities or on the analysis of the carbon performance of underlying assets for pledged pools of loans or securitised products. This could be done in different ways, including adjusting eligibility requirements, tightening risk tolerance, introducing tighter or specific mobilisation rules, etc.
(6) Positive screening
  • Accept sustainable collateral so as to incentivise banks to lend or capital markets to fund projects and assets that support environmentally-friendly activities (e.g. green bonds or sustainability linked assets). This could be done in different ways, including adjusting eligibility requirements, increasing risk tolerance on a limited scale, relaxing some mobilisation rules, etc.
(7) Align collateral pools with a climate-related objective
  • Require counterparties to pledge collateral such that it complies with a climate-related metric at an aggregate pool level.
Asset purchases
(8) Tilt purchases
  • Skew asset purchases according to climate-related risks and/or criteria applied at the issuer or asset level.
(9) Negative screening
  • Exclude some assets or issuers from purchases if they fail to meet climate-related criteria.

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