Earlier this month, US President Donald Trump’s administration drew a flurry of condemnations for its decision to repeal the Environmental Protection Agency ( EPA )’s “endangerment finding”: a formal, evidence-based acknowledgement that greenhouse gas emissions pose a threat to public health. Although the change may seem minor, it is anything but. Since 2009, the endangerment finding has underpinned much of the climate-related policymaking at the EPA and other agencies.

For the financial world, the implications are more significant than they may initially seem. True, the change does not directly affect the US Federal Reserve’s policymaking. But as Trump suggests, it could reduce short-term cost pressures in high-emissions industries, which may in turn lower inflation by some very small amount.

Moreover, the repeal could make the Fed even more cautious in how it weighs the impact of climate change on the economy and the financial sector. Although Fed chair Jerome Powell is generally considered a climate laggard among the world’s central banks, Fed supervisors have integrated climate factors into their banking stress tests. That may now change, not only because of the repeal, but also because Kevin Warsh, Trump’s nominee to succeed Powell in May, has long objected to what he sees as mission creep at the Fed.

For example, Warsh has described the presence of climate considerations in financial stability assessments as a form of “contraband”, arguing that, “Central bankers and bandwagons should be strangers.” The Fed already ranks 17th of 20 institutions assessed by Green Central Banking ( three places below Russia’s central bank ); under Warsh, it would be relegated further.

The situation is quite different across the Atlantic. On February 13, the European Central Bank ( ECB ) fined Crédit Agricole in France for non-compliance with a climate-related rule, following its failure to conduct a materiality assessment within 75 days. For that small misstep, it now must send €7.5 million ( US$8.9 million ) to the ECB. With total assets of around €2.37 trillion, Crédit Agricole will survive the slap on the wrist. But banks across Europe have taken notice.

For European banks, it may sometimes seem as if there is little other than contraband on board ECB president Christine Lagarde’s ship. In January, the ECB confirmed that it had fully embedded climate risks into both its monetary and financial stability objectives, thus reaffirming its commitment to meet the emissions reduction goals expressed in the Paris climate agreement. The ECB is in fourth place in the green league table – but only because three component parts of the Eurosystem – France, Germany and Italy – hold the top three slots.

In this area, as in many others, the transatlantic gap seems to be widening by the day. What, then, are the implications for the banking system in each jurisdiction?

In the short run, the disparity may give a comparative advantage to US institutions, because European banks face higher compliance costs. Climate stress tests are both expensive and time-consuming. Banks must assemble data not only on their own emissions ( usually trivial ), but also on those tied to the projects and institutions they finance through their lending. For mid-sized banks, in particular, this burden is not immaterial. ( While bigger banks face higher costs, it is probably only on the order of €100 million for the largest – an unwelcome, but not life-changing, cost. )

By contrast, US banks will shoulder a much smaller burden, because they need only meet the ECB requirements with respect to their operations in the European Union, and they will have an additional short-term competitive advantage in lending to the fossil fuel industry. Moreover, climate risk has even begun to feed into the ECB’s assessment of capital requirements, with talk of capital add-ons for lending to companies with no net-zero commitment. That is not going to happen in the United States in the foreseeable future.

Still, EU banks may gain an advantage in lending to the renewables sector. Now that they are incentivized to move away from oil, gas and coal, they are developing expertise in these future-looking industries.

The longer-term implications are less certain. Those who believe strongly that climate change will reshape our economies argue that the EU will have a more resilient and sustainable financial sector if banks and insurers anticipate the effects of global warming. Meanwhile, US banks may be left with unusable collateral if fossil fuel industries are prevented in the future from burning the assets on which their repayment ability depends.

Proponents of this view also point out that the People’s Bank of China ( PBoC ) is more European than American in this area. True, the PBoC is more integrated into other policy structures than the West’s central banks; it has not visibly allowed climate-related factors to affect interest rates or used capital requirements to penalize “brown” lending. It has, however, introduced interest rate subsidies for banks that lend to “green” sectors, earning it sixth place in the climate league table, one notch above the Bank of England.

For those of us who like to see competition on a level playing field, the ongoing divergence in central-bank policy frameworks is not good news. I suspect that, if left to their own devices, the major central banks could find a way to get back on the same page. But the different political contexts in which they operate makes that very difficult, leaving us to learn to live in a multi-speed environment as the planet gets warmer and wetter.

Howard Davies is a professor at Sciences Po and a former chairman of the United Kingdom’s Financial Services Authority, director of the London School of Economics, deputy governor of the Bank of England and director-general of the Confederation of British Industry.

Copyright: Project Syndicate