This article analyses the role that central banks could play in dealing with stranded ‘brown’ assets as a result of the ecological transition. The latter could transform monetary authorities – the central banks – into « liquidators of last resort » for stranded fossil assets markets. In practice, this role would consist of central banks purchasing stranded fossil assets in order to close these markets. This central bank balance sheet policy would allow the decarbonization of the balance sheets of the financial sector, thereby facilitating the ‘greening’ of their balance sheets and, more broadly, the ecological transition and its speed.
To assess the practical feasibility of this central bank balance sheet policy, we are building a database that compiles estimates of the amounts of stranded assets for five geographical areas (the whole world, the USA, the European Union including the Eurozone, the United Kingdom and Japan), drawing on 29 publications over the period 2011-2022, which provide a total of 253 valuations. These estimates suggest that central banks, as ‘liquidators of last resort’ of stranded asset markets, would inject volumes of liquidity comparable to those they injected to deal with previous crises (the 2007-2009 global financial crisis and then Covid), at least in the high-income countries in our database. We then discuss the implications of our estimation for the credibility of central bank balance sheet policy and its implications for the speed of the ecological transition. Finally, we analyse the risks associated with this « green » balance sheet policy by central banks and propose strategies to limit these risks. We also offer theoretical foundations for our proposal of a liquidator of last resort, ideas according to the Minsky’s theory of endogenous financial instability which involves preventive action by the central bank tailored to the changing sources of instability.
Keywords: “market liquidator of last resort;” central bank balance sheet policy; brown and fossil stranded assets; decarbonization; ecological transition; Minsky
