city week – london, 24 april 2023 the role of central banks in the “ macroeconomics of climate change ” speech by francois villeroy de galhau, governor of the banque de france page 1 sur 8 ladies and gentlemen, it is once more a great pleasure and honour for me to give a keynote speech today at the city week in london, held in the venerable guildhall. it is no longer possible to seriously question the severe effects of climate change, but the role of central banks in this area has become an increasing focus of discussion. let me start by two very great temptations that have become typical pitfalls here. neither magic wand, nor ostrich policies we could call the first of these the « magic wand temptation » in which central banks are seen as being able to curb climate change on their own. i want to be crystal clear on this : central banks cannot be the only green game in town, they cannot replace sound public policies and corporate transition plans. one necessary step for public policies is to put a price on carbon : it is the only signal capable of aligning climate imperatives with economic agents ’ decisions. it is the only way to make more green projects profitable ; and green finance without enough green projects risks running idle. it can take various forms, including a carbon tax, in which case part of the resulting public receipts should be invested in low carbon alternatives, and another part redistributed to households in order to mitigate its social effects. a price on carbon should be supplemented with other climate regulations and subsidies to help develop alternatives sufficiently early. the second and opposite temptation is that of “ ostrich policies ”, which consist of burying our head in the sand to avoid seeing or hearing what is going on. this is not an option either. we are directly concerned, in two different ways [ slide 2 ]. page 2 sur 8 first as supervisors, insofar as climate - related risks are clearly among the long term risks to which financial institutions are exposed : monitoring these risks is not a “ nice to have ”, or part of a csr policy, but a “ must have ”. second, we are concerned as central banks in charge of price stability. just to clarify, we shouldn ’ t waste too much time here in the legal and political debate on centralbank mandates. central banks ’ core mandate worldwide is price stability, and climate change already affects the level of prices and activity – think of severe drought in argentina which

discount window and securities lending and the opening of our lending facilities to more counterparties. many other central banks also found that they needed to adapt their methods of providing liquidity to the unusual pressures associated with the market turmoil since last summer. although specific actions varied according to the severity of the pressure and the characteristics of the preexisting operational framework, many central banks concentrated operations more in longer maturities, broadened the range of collateral accepted in various types of operations, and increased the utility of standing loan facilities ; some made loans in other currencies by use of swaps with the federal reserve, enhanced securities lending operations, and engaged in auctions or other new methods to distribute some kinds of liquidity. in many cases, these innovations involved a degree of cooperation in timing or action across central banks. normally, most central banks supply and absorb reserves primarily in the safest and most liquid parts of the money markets. 2 in these segments of the markets they can operate in size without distorting prices, and without preferential treatment for certain private borrowers or forms of collateral. the private sector then distributes the reserves around the markets – across counterparties, maturities, and degrees of creditworthiness. the resulting transactions enhance market liquidity and allow private market participants to allocate credit and determine the appropriate compensation for taking risk. however, this private - sector intermediation process in money markets became severely impaired in the recent turmoil. as i already mentioned, uncertainty about the value of assets, about the creditworthiness of counterparties, and about future calls on the liquidity and capital of important market participants caused liquidity to dry up in many segments of the money markets. a flight to liquidity and safety is not unusual when uncertainty rises and markets are disturbed, but the breadth and persistence of this turmoil and its spread into money markets made it a substantial threat to financial and economic stability. to ameliorate the threat to financial and economic stability, the federal reserve and a number of other central banks in effect found they needed to provide a substitute for the arbitrage and trading no longer being undertaken in sufficient size by the private sector. these central banks changed the composition of their balance sheets, selling or lending the assets that were in especially strong demand and lending against the illiquid assets the private sector was having difficulty financing. the purpose of those moves has been to forestall fire sales of assets that could no longer be financed, to facilitate orderly deleveraging and