Climate change and financial regulation

Dimitri G. Demekas and Pierpaolo Grippa

Chapter 22 in Handbook of Climate Change and Financial Markets, 2026, pp 456-490 from Edward Elgar Publishing

Abstract: As in the aftermath of the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed help facilitate the reorientation of financial flows necessary for the energy transition. But they may find themselves having to balance exaggerated expectations against limited capabilities and political economy constraints. Given the nature of climate risk, risk assessment models cannot provide a reliable basis for calibrating capital requirements. On the basis of the evidence, prudential tools would have only a negligible impact on the transition. Expanding the central banks and financial regulators’ legal mandates to take on these additional, essentially political, responsibilities can have potential pitfalls and unintended consequences on their independence and ability to pursue their main policy objectives, as well as on financial markets. Ultimately, there is nothing financial regulation can do about the energy transition that an appropriately designed carbon tax cannot do better. Central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of “the only game in town.”

Keywords: Financial stability; Financial regulation; Climate change; Climate mitigation policy; Low-carbon economy; Energy transition; Carbon price; Green finance (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.elgaronline.com/doi/10.4337/9781035340422.00032 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:elg:eechap:23637_22

Ordering information: This item can be ordered from
http://www.e-elgar.com

Access Statistics for this chapter

More chapters in Chapters from Edward Elgar Publishing
Bibliographic data for series maintained by Jack Sweeney ().