The climate crisis is destabilizing the lives of most of humanity while also worsening inequities and disparities around the world. Within this context of more intense and frequent disruptions, the quest for societal stability and social justice requires transformative change in financial flows and financial structures. Yet the COVID-19 pandemic and early 2020s instability in global banking reveal how monetary policy and central bank actions further concentrate wealth and power among those who are already privileged. Monetary policies designed to promote stability in times of crisis have exacerbated economic inequities and disproportionally benefited billionaires and corporate interests while disadvantaging most people and sustaining the status quo (Sokol Reference Sokol2023). When governments around the world are willing and able to swoop in rapidly with policy changes to protect wealthy investors to ensure financial stability without considering how their policies are worsening climate instability and increasing economic precarity, there is a serious disconnect among stability in climate policies, stability in financial systems, and stability in the earth’s climate systems (Chatterji and Stephens Reference Chatterji and Stephens2023).

Climate justice is an approach to climate action that goes beyond narrow efforts to reduce greenhouse gas emissions (Robinson Reference Robinson2018; Stephens Reference Stephens2022a). Climate justice centers the fact that climate change is inextricably connected to social justice, gender justice, racial justice, and economic justice because marginalized communities that have long faced underinvestment are more vulnerable to climate disruptions of all kinds, including extreme heat, flooding, storms, and food insecurity (Roberts-Gregory Reference Roberts-Gregory, Hall and Kirk2021). A commitment to climate justice is a paradigm shift from more conventional, technocratic ways of defining climate action (Sewerin et al. Reference Sewerin, Cashore and Howlett2022), because climate justice focuses on investing in people and communities through initiatives that acknowledge and try to repair past environmental injustices while preventing continued and future climate injustices (Kashwan Reference Kashwan2021; Stephens Reference Stephens2020). A commitment to climate justice is a commitment to societal transformation, because climate justice acknowledges that the climate crisis is a symptom of flawed economic and political systems that concentrate wealth and power through exploitative and extractive processes (Sultana Reference Sultana2022). A climate justice lens recognizes the reality that despite decades of dire warnings from climate scientists, political leaders around the world have been unable to resist the influence of corporate and financial interests and have inadvertently prioritized corporate interests over the public good (Stephens Reference Stephens, Agyeman, Chung-Tiam-Fook and Engle2022b; Stoddard et al. Reference Stoddard, Anderson and Capstick2021). An underappreciated point that we make in this chapter is that to achieve societal transformation for a stable, climate-just future, transformation of financial systems is required, which requires repoliticizing finance. This involves a new and different role for monetary policy, finance, and central banks, which have been considered apolitical in the large Western economies of the United States, the UK, and the European Union (EU), in line with the mantra of “central bank independence.”

This chapter recognizes both synergies and tensions between the quest for stability of financial systems and the quest for stability in climate policies and highlights the need to (re)politicize central banks, monetary policy, and financial innovations. The chapter acknowledges antagonism in climate politics between two schools of thought. First, those advocating for a smooth transition guided by clear, predictable, and stable policies that can be leveraged by the wealthiest people and corporations. Second, those advocating for a more radical politics that disrupts and disempowers those who currently are the most privileged (Paterson et al. Reference Paterson, Tobin and VanDeveer2022), and for innovations in financial systems that could redirect society toward a more just, equitable, and stable future in the long term. The critical role of monetary policy, central banks, and managing financial risks in preparing for a more stable future is explained and explored, recognizing that this entails a repoliticization of monetary policy. Given that the people and institutions who would benefit most from financial innovations to advance climate justice do not have much power within current systems to facilitate and encourage transformative change, and recognizing that those who are profiting within the current systems are leveraging their power and influence to resist change and perpetuate the status quo, we propose a paradigm shift to reconceptualize stability and politicization in financial systems for climate justice. We explain how current mainstream depoliticized prioritization of financial stability is, in fact, worsening climate instability. We further argue that, conversely, current mainstream perspectives on climate policy stability are worsening long-term financial instability by reinforcing a depoliticized perspective on the role of financial institutions including central banks. We conclude by emphasizing that finance, central banks, and their monetary policies are an underappreciated part of climate politics and suggest that transformative climate policies require (re)politicization of finance and financial innovations.

7.1 Financialization and the (De)Politicization of Central Banks

Central banks – public institutions in charge of monetary policy (and often of banking regulation too) – are key to climate justice and are, therefore, a critical part of climate politics, yet they are under-analyzed (Sokol and Stephens Reference Sokol and Stephens2022; Stephens and Sokol Reference Stephens and Sokol2024). Only recently have some climate policy scholars begun to focus on monetary policy and how to link monetary policy with questions on how to respond to the chaos and instability of climate change and how to advance climate justice (Boneva et al. Reference Boneva, Ferrucci and Mongelli2022; Kroll Reference Kroll2022; Langley and Morris Reference Langley and Morris2020). The power of central banks to influence the financial systems has increased in the past four decades or so, in an era of financialization (Mader et al. Reference Mader, Mertens and van der Zwan2020; Walter and Wansleben Reference Walter and Wansleben2020), coinciding with the drive toward the depoliticization of monetary policy under the slogan of “central bank independence” (Fontan and Larue Reference Fontan, Larue, Borch and Wosnitzer2021). Financialization, a process of expanding the power of finance and debt in the economy (Lapavitsas Reference Lapavitsas2013; Lazzarato Reference Lazzarato2012; Stockhammer Reference Stockhammer2008), has created a complex web of financial flows between creditors and debtors at multiple scales, and this ascendance of finance has provided a cover for depoliticization of wealth accumulation while also empowering banks and corporate interests to ignore the risks and inevitable instabilities of the climate crisis.

In response to a lack of theoretical tools to analyze the financialized, debt economy (Lazzarato Reference Lazzarato2012), the concept of “financial chains” was developed to elucidate the circulation of credit and debt in the economy (Sokol Reference Sokol2017, Reference Sokol2023; Sokol and Pataccini Reference Sokol and Pataccini2020). “Financial chains,” defined both as channels of value transfer (between people and places) and as social relations of power (Sokol Reference Sokol2017), reveal the way in which financial architecture built on debt perpetuates inequality and instability. The “financial chains” framework highlights the central role of central banks in the financial system and in financialized capitalism more generally (Sokol Reference Sokol2023). Crucially, central banks set an interest rate and in doing so they manipulate the cost of debt throughout the economy. They lend money to banks and intervene in financial markets, for instance, by buying and selling government and corporate debt. In these ways, central banks are directly creating and managing “financial chains” with major implications for the rest of the economy. The importance of these interventions increases with increasing financialization of the economy. This has been highlighted by a series of crises, from the global financial crisis of 2008 to the COVID-19 pandemic of 2020 in which the monetary policy of central banks had major political implications. In fact, it would not be an exaggeration to say that without massive central bank interventions during these crises, the economic system would have probably collapsed (Sokol Reference Sokol2023). This central position of central banks in the economic system also makes them critical institutions for climate politics (Sokol and Stephens Reference Sokol and Stephens2022). The critical role of central banks in these times of crises has led to greater political scrutiny of the politics of monetary policies.

7.2 Monetary Policy, Central Banks, and the Climate Crisis

Monetary policy refers to the decisions, actions, and communications of central banks as they influence the supply of money and the availability of credit in the economy (Boneva et al. Reference Boneva, Ferrucci and Mongelli2022). The macroeconomic objectives of monetary policy tend to focus on price stability and financial stability; climate stability has not yet become an important objective of monetary policy (Dikau and Volz Reference Dikau and Volz2021). Only since the 2010s have some central banks begun to consider and integrate climate disruptions and the climate crisis into their policies and operations (Dafermos Reference Dafermos2021; NGFS 2022; Volz Reference Volz2017).

It is worth noting here that leading central banks of the Global North, including the United States, the UK, and the EU, are doing less to integrate climate disruptions and promote “green central banking” than their Global South counterparts (see, e.g., Barmes and Livingston Reference Barmes and Livingstone2021; Dikau and Ryan-Collins Reference Dikau and Ryan-Collins2017; Volz Reference Volz2017). In the Global South, monetary authorities are less constrained by the imperative of “central bank independence,” which allows them to be more aligned with other national policy priorities, including responding to climate instability (Dikau and Ryan-Collins Reference Dikau and Ryan-Collins2017). Some central banks in the Global South have thus introduced various measures to support the “green transformation” (Stephens and Sokol Reference Stephens and Sokol2024). And the Chinese central bank has implemented a differential interest rate strategy for high/low-carbon investments (Kedward et al. Reference Kedward, Gabor and Ryan-Collins2022). In comparison, Western central banks are less advanced in “greening” their monetary policies, constrained by their price stability mandates and the goal of being “independent” from politics. The US Federal Reserve, the most powerful central bank in the world, is a case in point. In January 2023, the chair of the US Federal Reserve, Jerome H. Powell, declared that it would be “inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy” (see Chatterji and Stephens Reference Chatterji and Stephens2023). This perception that responding to the climate crisis is too political for the central bank’s monetary policy is, in fact, an ironic politicization of the stability mandate. By ignoring or dismissing climate destabilization in its policies, the US Federal Reserve is taking a political stance.

With rapidly accelerating climate instability and disruptions of all kinds, Langley and Morris have argued that central banks may well become “climate governors of last resort” (Langley and Morris Reference Langley and Morris2020). Yet, despite some recent attention to the “greening” of the financial system, most central banks continue to support investment in climate-damaging fossil fuels (Dafermos Reference Dafermos2021; Sokol and Stephens Reference Sokol and Stephens2022). Financialized and seemingly “depoliticized” monetary policy also continues to concentrate wealth among corporate interests who then have more political power to resist policy action toward climate justice, so central banks are politicizing climate action while pretending to ignore the stabilizing need for climate policy. In multiple ways, central banks are in fact continuing to exacerbate climate instability and increase vulnerabilities to climate disruption (Sokol and Stephens Reference Sokol and Stephens2022).

7.3 Central Banks at a Crossroads: Between Stability and (Re)Politicization

Central banks are at a crossroads. Echoing the tension between “stability” and “politicization” highlighted by Paterson, Tobin, and VanDeveer (Chapter 1, this volume), we consider the path forward for central banks. Clearly, there is growing recognition of the need for transformative change to move on a path toward climate justice, but whether the changes in financial systems should strive for stability or intentional disruption is an open debate (Paterson et al. Reference Paterson, Tobin and VanDeveer2022). Given that there are relatively few climate policy experts focusing on monetary policy and the role of central banks in climate policy (Bailey Reference Bailey2023; Boneva et al. Reference Boneva, Ferrucci and Mongelli2022; Stephens and Sokol Reference Stephens and Sokol2024), this is an underexplored and under-analyzed issue. Yet this is an issue that requires urgent attention.

For decades, central banks in leading Western economies have been operating according to the “central bank independence” mantra. As part of this, central banks have been considered depoliticized. Released from direct government control (and the political influence that goes with it), Western central banks have been operating as beacons of policy stability. For some, this policy stability is what successful climate policy should aspire to (Mildenberger and Lockwood, Chapter 13, this volume). However, in the case of central banks and their monetary policies, this policy stability largely works against climate objectives. Indeed, in the name of stability, central banks can be relied on to support financial markets and financial players at whatever cost. Policy stability pursued by central banks (plus a narrow interpretation of their mandates) means that central banks now seem unable to respond to the worsening climate instability that the world’s economies are facing. This inability means that central banks are currently at odds with the need for a rapid and radical transformation. Repoliticizing central banks so that monetary policy is aligned with energy and climate policy would therefore seem necessary for the systemic financial changes that are needed for climate justice.

While some maintain that central banks should ignore climate issues and continue to use the same old tools in a futile attempt for short-term financial stability, others are increasingly recognizing how critical central banks are for transformative climate politics and climate policy. Among those who do recognize the central role of central banks, some may assume that simply aligning monetary policy with other climate policies or objectives can ensure a smooth and “stable” transition. However, given the scale and speed of transformation needed, this may be too little too late. Indeed, it is likely that a more radical approach may be required. One such approach could consist of an intentional, short-term “creative disruption” to the financial system led by central banks (Sokol and Stephens Reference Sokol and Stephens2022). A short-term destabilization of the financial system may be necessary to make the financial reset for long-term stability and sustainability. Such a dramatic change requires repoliticizing monetary policy and broadening (and/or reinterpreting) the current “stability” mandates of central banks. New mandates would need to acknowledge that in a world of worsening climate chaos, long-term stability requires short-term disruption to steer humanity onto a different path toward a more stable, just, healthy, and sustainable future. To do this, central banks, monetary policy, and finance more broadly need to be (re)politicized. Acknowledging that an intentional repoliticization of central banks will have multiple consequences, it is important to recognize that central banks are already very political. With monetary policy consistently advantaging the most privileged in society while disadvantaging those who are already marginalized and vulnerable, the myth of “central bank independence” as is currently projected and perceived in most Western economies (Davies Reference Davies2023) needs to be dismantled.

For a proposed “creative disruption” to have the desired effect of advancing climate justice, monetary policy would need to become part of an all-of-government approach to climate policy. This would mean that monetary policy would be (re)politicized, debated, and contested. Furthermore, implementing “creative disruption” for climate justice would require monetary policy to integrate climate action with social, economic, and environmental justice. In practical terms, this would require monetary policy to align with – and support – a range of other policies, including fiscal policy, energy policy, industrial and trade policy, social welfare policy, gender equality policy, and other social policies (Sokol and Stephens Reference Sokol and Stephens2022).

This transformation in banking also means tackling head on the so-called climate paradox view (Carney Reference Carney2021), which suggests that some choices may need to be made between addressing climate change or guaranteeing financial stability. Recent actions (from unconditional QE to raising interest rates which have benefited fossil fuel companies) demonstrate that when central banks are faced with the above dilemma, they have consistently chosen financial stability over climate stability. This preference for always prioritizing short-term financial stability accelerates climate chaos and thus contributes to the inevitability of much bigger financial instability ahead. It is time to resist and reconsider the traditional notion of financial stability and to reclaim and restructure the financial sector toward a more climate-just future. Rather than accepting the idea of a paradox or dilemma, it can be argued that long-term stability requires short-term disruption in the way monetary policy is implemented. Instead of reinforcing an artificial choice between climate stability and financial stability, there is a growing recognition that financial stability requires climate stability, and prioritizing long-term, environmental, social, and economic stability requires a paradigm shift in climate politics and climate policies.

A paradigm shift also requires a major change in how central banks are considering climate risks. Currently, there are two major categories of risk that central banks associate with climate change in their efforts to safeguard financial stability: physical risks and transition risks (Boneva et al. Reference Boneva, Ferrucci and Mongelli2022; Kroll Reference Kroll2022; Langley and Morris Reference Langley and Morris2020). Physical risks include financial losses of banks (and other financial institutions) from increasingly volatile climate-related disruptions and weather events (storms, floods, heat waves) as well as from impacts of long-term climate changes (e.g. sea level rise). Transition risks, on the other hand, include financial losses that financial institutions can suffer as a result of “a rapid low-carbon transition, including radical policy shifts, reputational impacts, technological breakthroughs or unexpected limitations, and shifts in market preferences and social norms” (Svartzman et al. Reference Svartzman, Bolton, Despres, Pereira Da Silva and Samama2021: 565). We argue that there are two major issues with the framing of these two categories of risk. First, this framing conceptualizes financial institutions as mere victims of the climate crisis, rather than recognizing that they are active participants in destabilizing climate (with the support of central banks, as discussed). Second, as long as “transition risks” include the apparent risks from policy shifts needed to decarbonize (and thus to reduce “physical risks”), there is a major contradiction at the heart of the efforts to achieve financial stability using these two types of risk as a guide. At the extreme, it is perfectly conceivable that powerful financial institutions and central banks can argue/lobby for slowing down climate action in the name of safeguarding (short-term, narrowly defined) financial stability.

Advocating an intentional disruption in financial systems goes against the prevailing current wisdom about how central banks should respond to the deepening climate crisis (which is focused on mitigating financial disruptions). It also challenges assumptions about “stability” and how stable and just futures can be achieved. However, given that transformative change is needed, it is likely that without some kind of politicized intentional disruption of how financial systems operate, climate instability and climate injustice will accelerate and worsen. Given the intersecting and cascading impacts of climate disruptions, a comprehensive agenda for large-scale transformation toward climate justice has to include a combination of policy instruments that result in coordinated investments in reducing climate vulnerabilities while simultaneously resisting fossil fuel extraction and reliance and supporting investment in a more equitable, healthy, and renewable-based future.

7.4 Conclusions

In this era of worsening climate crisis, all politics is climate politics (Aronoff et al. Reference Aronoff, Battistoni, Cohen and Riofrancos2019). We argue, therefore, that the politics of our financial systems is climate politics and the monetary policies of central banks is also climate politics. For too long, central banks in the West have been hiding behind the mantra of “central bank independence” as supposedly apolitical institutions, without democratic scrutiny, decoupled from electoral cycles. As such, central banks have been ensuring “policy stability” of neoliberal economic management whose limits are now plainly visible. But this façade of depoliticized monetary policy is no longer viable or credible. Central banks and their monetary policies need to be repoliticized, and climate stability requires innovations in how financial systems are managed and structured.

Although climate politics has not yet adequately considered and integrated the critical role of finance and monetary policy, this is changing quickly as the monetary policy quest for “stability” is increasingly elusive, and the high cost of responding to climate disruptions and preparing for climate adaptation is being linked to finance (Kasdan et al. Reference Kasdan, Kuhl and Kurukulasuriya2021; Kuhl et al. Reference Kuhl, Shinn, Arango-Quiroga, Ahmed and Rahman2024). In this rapidly destabilizing world, climate politics needs to expand and reconceptualize the linkages among climate policy stability, financial stability, and climate justice.

We suggest that the effective repoliticization of finance, central banks, and their monetary policies requires a paradigm shift in how we conceptualize stability. Short-term stability that continues to concentrate wealth and power among a few is not in anyone’s best interest in the long term. Given that the people and institutions who would benefit most from financial innovations to advance climate justice do not have much power within current systems to facilitate transformative change, repoliticization of monetary policy needs to focus on climate justice. Recognizing that those who are profiting within the current systems are leveraging their power and influence to resist change and perpetuate the status quo, political struggle and contestation are necessary.

As the climate crisis gets worse, the threats of multiple other destabilizing crises are simultaneously expanding. Pandemics, wars, inflation, species extinction, and resource scarcities are also destabilizing forces, which means we are living in a time of the “polycrisis” (Tooze Reference Tooze2022). When facing multiple interrelated crises, the simplistic, narrow priorities of the large Western central banks are completely insufficient in supporting long-term financial and societal stability. The limits of neoliberal monetary policies in dealing with the “polycrisis,” let alone advancing climate justice, are now being fully exposed.

By emphasizing the critical role of monetary policy, finance, and central banks in the climate crisis, this chapter challenges mainstream assumptions regarding financial stability and depoliticized monetary policy and emphasizes how policy alignment and an all-of-government approach are necessary for transformation. When an all-of-government approach to transformative climate policies is embraced, new rules, different assumptions, and novel ways of thinking about financial stability and financial disruptions will emerge. A new political commitment to embracing the concept of “policy-mixes” is essential to link climate policies with monetary policy for the transformative societal changes that are needed for future societal stability.