MNI INTERVIEW1:Yellen Calls For Carbon Tax, Green Stress Tests

Former Federal Reserve chair Janet Yellen in an interview Wednesday called for the United States to implement a gradually-increasing carbon tax, complimented by levies on carbon-intensive imports, and for climate-related risk to be incorporated into bank stress tests in a bid to curb dependence on fossil fuels by 2050.

Financial institutions should put numbers on climate-related risk, to allow the Fed assess the resilience of the financial system, she told MNI. Corporate climate risk disclosures might also redirect capital formation toward green investment, Yellen said, adding that banks should also be required to produce plans to transition to more climate-friendly business practices .

"It's an important role that central banks can play to make sure banks that they supervise are thinking about this risk. But the prime role here for addressing climate change has to be public policy," she said, adding that she now saw climate initiatives as more pressing than she had during her Fed tenure.

Speaking ahead of the release of a Group of Thirty report Thursday urging the world economy to set a net-zero carbon emissions goal by 2050, Yellen said revenues from a carbon tax that rises significantly over time would be redistributed to the public, so 70% of households would be compensated for higher energy prices. A tax would also allow reductions in expensive environmental regulations.

"One can get rid of some regulations that industries hate while being more ambitious in terms of climate goals," Yellen said.

CARBON LEVY ON IMPORTS

To offset the tax's impact on trade, charges should be imposed on carbon-intensive imports, which would be consistent with WTO principles, she said. "Putting border adjustments in place for countries that do not have their own carbon pricing regime, it's something that encourages other countries to put together a carbon pricing regime so they would not be subject to border adjustments."

"It's essential that every country be part of this and that's one of the things that makes this so challenging, because there's an incentive to free ride," she said. "The U.S. has to be part of this."

The response to coronavirus has shown that "we're flexible and able to make adjustments that once upon a time would be considered unthinkably difficult," she said, adding that she believes such changes could begin under a Joe Biden administration. Biden has yet to explicitly endorse a carbon tax.

Recovery from the pandemic crisis also presents an opportunity to invest in green infrastructure, including clean energy and smart grids, Yellen said.

"We have a huge unemployment problem resulting from the crisis that would need to be addressed," she said. "If we engage in significant programs to boost the economy and create new jobs and put people back to work, what could we do that could lead to a more healthy environment?" she said.

"It may require a change in the White House for the United States to move on climate change, but if there is, I believe there is enough broad political and public support to take the kinds of steps indicated here."