Wikipedia defines Nudge Theory as “positive reinforcement and indirect suggestions as ways to influence the behavior and decision making of groups or individuals.” As a parent I would imagine this is a useful tool in guiding children towards a more fruitful existence, though I doubt children would be pleased if they knew what was going on and I’m sure Nudge Theory is the root cause of many teenage rebellions. Similarly, governments walk a tightrope in leveraging public policy to nudge business and people in a healthier direction. As an example, the anti-tobacco movement fostered a debate on government overreach, even if both sides were hoping tobacco consumption would fall (which it did). We’ve written about how public policy can be a useful tool in fostering innovation, particularly at the local level where in my opinion most of the actual work gets done. Public policy at the international level needs to be carefully implemented as shortcomings in oversight can have unintended consequences and work against the desired goal. As the below classic cover from “The Saturday Evening Post” depicts, people are always looking for a way to tip the scales in their direction.
The Network For Greening The Financial System (NGFS) recently published a report outlining nine ways central banks can use monetary policy to tackle climate change. The NGFS is a network of central banks that work together to fight climate change and to “mobilize finance to support the transition toward a sustainable economy”. Importantly, the US Federal Reserve and the European Central Bank are members, and while NGFS recommendations are voluntary they are closely evaluated by the powers that be. The below table lists the nine options as detailed in their report published March 2021.
Source: Network For Greening The Financial System (NGFS)
To summarize the above, the report recommends central banks direct their purchasing power to entities that have the lowest climate-related risks, and this would be accomplished via oversight of an entity’s Credit Operations, Collateral, or Asset Purchases. The good news is international public policy tends to be non-binding in nature, and in fact the above recommendations are strictly voluntary. To me the idea is both interesting and alarming. For example: How do you define climate-related risk and keep the definition from being manipulated? What are the unintended consequences of favoring some sectors over others? It’s also odd because project financing is not an issue for developers, as renewable energy companies already have very low costs of capital.
Perhaps subconsciously there is a fear the general public will view this type of public policy as benefiting only big business and large corporations, as central banks are unlikely to direct cash to small businesses for a variety of reasons. Small business makes the world go around, and the de-carbonization movement asks everyone to make big sacrifices for the greater good. It’s therefore risky for policymakers to tip the scales in favor of the companies that are least likely to need the help. Once again, public policy can be a useful tool in fostering innovation though that isn’t a blanket statement that all public policy is good policy. I believe public policy should be directed towards harnessing humanity’s competitive spirit and incentivize the least of us to do the most.
RENEW Performance Tracker
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