Carbon pricing ‘only way’ to deliver green transition, says Banque de France chief

Work on climate change does not mean central banks are wading into politics, Villeroy argues in London speech.

Banque de France (BdF) governor François Villeroy de Galhau has called for governments to set carbon prices and staunchly defended the involvement of central banks in addressing the climate crisis.

Speaking at a City Week event in London, Villeroy said that putting a price on carbon through a tax or other policies, was “the only signal capable of aligning climate imperatives with economic agents’ decisions” and “the only way to make more green projects profitable”.

Without enough green projects, green finance “risks running idle”, he said.

Proceeds from such a tax should be allocated to low-carbon alternatives, and to households to address the potential “social effects” of the policy, Villeroy added.

Carbon prices implement the “polluter pays” principle by imposing a cost to company emissions via a tax or cap-and-trade market.

Research from the European Central Bank (ECB) has suggested that the introduction of even a $50 per tonne carbon price – which falls at the low end of many climate policy proposals – would result in an emissions reduction four times larger than the maximum reductions achieved if the bank were to exclusively buy green bonds.

Refinitiv data shows carbon prices reached record highs in 2022, with the price of permits on the EU’s carbon market averaging more than €80/tonne, up 50 percent from the previous year. A Goldman Sachs analysis estimates that a price of more than $100 per tonne is needed to reduce global emissions by 50 percent with current technologies.

However, Villeroy’s comments come days after the Federal Reserve Bank of New York suggested that the extreme carbon taxes used as the basis for central banks’ forward-looking climate analysis could be unfeasible.

In a newly published research paper, NY Fed staff said it was “somewhat implausible” that policymakers would, for example, implement a carbon tax “of a magnitude that would jeopardise the short-run debt-servicing abilities of high-emissions firms or dramatically reduce economic activity”.

Plenty of scope

Addressing the question of central banks’ ability to act on climate, Villeroy said existing mandates give policymakers plenty of scope.

“Monitoring [climate-related] risks is not a ‘nice to have’, or part of a CSR policy, but a ‘must have’… Central banks’ core mandate worldwide is price stability, and climate change already affects the level of prices and activity.”

He added: “It’s not mission creep, it’s not a politicisation of our mandate. It is our core business and core duty.”

Villeroy, formerly chief operating officer of BNP Paribas group with oversight of corporate social responsibility, previously defended central bank involvement in climate issues after allegations of mission creep were made in a 2019 Wall Street Journal column.

At the time, the US Federal Reserve was facing waves of Republican opposition to its decision to join green central banking group the Network for Greening the Financial System (NGFS) in 2020, and to launch its inaugural climate scenario analysis exercise.