Could the Federal Reserve Save Climate Action From the Supreme Court?

Lately, it’s been getting harder to imagine how Americans who care about securing a livable future will win the federal action necessary to stave off the most catastrophic climate scenarios and maintain organized human civilization on this planet. President Joe Biden’s Build Back Better package, which included a half-trillion-dollar proposed investment in renewable energy, died at the hands of senators Joe Manchin and Kyrsten Sinema, and Senate Democrats are running out of time to revive even a watered-down version of its climate provisions.

If Democrats indeed lose their razor-thin House and Senate majorities in November’s midterm elections, the climate movement likely won’t see another opportunity to pass decarbonization legislation for years to come.

In response to Congress’s failure, many advocates are escalating their demands that the Biden administration ramp up its work on climate. For example, the Environmental Protection Agency (EPA) could more stringently regulate air and water pollution from the power sector; the Department of Energy could use federal funds to help states achieve their clean energy goals; and the Federal Energy Regulatory Commission could level the playing field for renewables in wholesale power markets where the permitting processes and rules are currently stacked in favor of fossil fuels.

While this executive branch strategy is crucial, it’s also hard to imagine that administrative action alone will stave off climate disaster, given the Supreme Court’s all-out war on the administrative state. In particular, the Court’s upcoming decision in West Virginia v. EPA is likely to severely limit at least one of the Biden administration’s main tools for climate action by striking down the EPA’s authority to regulate greenhouse gas emissions. And the opinion may go much further, potentially reviving some version of the nondelegation doctrine to drive a legal sledgehammer into the federal government’s broader regulatory capacity.

Fortunately, there is at least one avenue for federal action that could set America (and the planet) on a path towards a livable future while remaining far less vulnerable to judicial attack: monetary policymaking by the Federal Reserve.

The Fed is the United States’ central bank, responsible for promoting the stability of the financial system and supervising financial institutions and activities. Most importantly, Congress has instructed the Fed to use its monetary policy tools—capital reserve requirements for financial institutions, the discount rate banks pay for short-term loans from the Fed, the market for the purchase and sale of government securities, and so on— “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

These objectives are simply not achievable in a world of deadly heat, endless drought, rising seas, and other climate catastrophes. Considering that a recent study estimated the end-of-century cost of unchecked climate change at $551 trillion, which is more money than currently exists on Earth, the Fed’s pursuit of its triple mandate in the years to come requires it to tackle climate change, too.

A Fed climate agenda would focus on disrupting the market forces that brought the planet here in the first place. The Fed could, for example, utilize its discount window lending practices to discourage fossil fuel investments. The discount rate is the interest it charges banks and other financial institutions when they borrow to meet their cash reserve requirements. If a bank ends the day without enough cash on hand, it can obtain a short-term loan from the Fed’s discount window to cover the shortfall.

Here’s where the Fed’s discretion comes in: Sections 10B and 13(3) of the Federal Reserve Act give the Fed’s reserve banks wide latitude to determine what collateral they will accept in exchange for this “lender of last resort” support, requiring only that loans be “secured to the satisfaction of the Federal Reserve Bank.” That means the Fed could choose to provide a more favorable discount rate for green collateral, like clean energy assets, and a less favorable rate for fossil fuel-related collateral, like oil and gas investments. It could even go a step further and make fossil fuel collateral ineligible for assistance, placing an immense amount of pressure on financial institutions to drop these climate change-exacerbating assets.

The Fed could also join a number of its peer institutions around the world by buying up green bonds—debt securities that finance clean energy or other investments with positive climate impacts. Section 14 of the Federal Reserve Act, which includes state, county, and municipal bonds among the securities the Fed “shall have the power” to buy, allows the Fed to direct dollars towards local governments that are issuing debt to pursue climate goals. The Fed can also purchase private debt under Section 13(3) during “unusual and exigent circumstances.” While this term is not defined by statute, it arguably should apply to an existential threat like climate change, allowing the Fed to channel resources toward private-sector decarbonization efforts.

It’s hard to overstate the impact these strategies could have in furthering a clean energy transition, especially considering the role that fossil fuel finance plays in driving the climate crisis. A recent report found that the world’s 60 largest banks invested $4.6 trillion in fossil fuels in the six years since the adoption of the Paris Agreement, with four U.S. banks—JPMorgan Chase, Citi, Wells Fargo, and Bank of America—together accounting for one-quarter of all fossil fuel financing. You can’t build a new pipeline or oil well without financing, so shutting down these investments and directing those resources to green initiatives is an essential step in transitioning the economy off fossil fuels.

Best of all, unlike traditional agency action, the courts have regularly ruled that monetary policy is practically invulnerable to judicial review. In the precedent-setting case on this issue, Raichle v. Federal Reserve Bank of New York, the Second Circuit ruled in 1929 that the New York Federal Reserve Bank’s use of open-market operations and discount-window activities to raise interest rates was simply not justiciable. “It would be an unthinkable burden upon any banking system if its open market sales and discount rates were to be subject to judicial review,” wrote Judge Augustus Hand for the three-judge panel. “Indeed, the correction of discount rates by judicial decree seems almost grotesque.”

The opinion also clearly states that people cannot sue a Fed bank for its choice to sell securities, fix “unreasonably high” discount rates, or “refuse to discount eligible paper,” even if the “policy may be mistaken and its judgment bad.” In other words, if the Fed declines to make a loan at the discount window because a bank’s assets, in the Fed’s view, are exacerbating the climate crisis, courts have no power to second-guess that choice. This logic should also apply to decisions to green the Fed’s balance sheet, as the courts have extended broad deference to emergency lending decisions. For example, in a 1977 case centering on a Fed loan to a struggling bank, the Second Circuit, citing Raichle, wrote that “it is not for the courts to say whether or not the actions taken were justified in the public interest.”

Ironically, this refusal to exert judicial control over monetary policy was born out of the same conservative ideology that animates today’s assault on the administrative state. Raichle was decided in 1929, when the Federal Reserve Board had minimal authority over monetary decisions made by private Federal Reserve banks. So when the Raichle majority wrote that judicial review of open-market operations “would make the courts, rather than the Federal Reserve Board, the supervisors of the Federal Reserve System,” which would be a “cure worse than the malady,” it removed the only real mechanism of public oversight over a system that allowed private bankers to make monetary decisions of immense public import.

Today, however, the publicly appointed Federal Reserve Board has a majority of the seats on the Federal Open Market Committee, which controls discount rates and open-market operations. The recent confirmations of Biden nominees Lael Brainard, Philip Jefferson, and Lisa Cook have shifted the balance on the Federal Reserve Board dramatically; Brainard, in particular, has been an outspoken critic of the Fed’s failure to take climate seriously. With vigorous pressure from a united climate movement, this new Board could enact real climate action—action that, thanks to the courts’ Lochner era-free market commitment, is more resistant to judicial reversal than any other federal administrative actions.

Of course, even century-old precedent is not an absolute guarantee with today’s power-drunk Supreme Court, which could still remake its jurisprudence to interfere with the Fed’s monetary-policy authority, no matter how “grotesque” doing so would be. But an assault on the Fed would represent an eye-catching reversal, and entail a far more explicit flexing of judicial activism than the Court’s other targets within the administrative state require.

So when the Court’s opinion in West Virginia v. EPA comes out next month, don’t let it make you feel hopeless about the federal government’s capacity to act on climate. The Fed sits squarely at the center of one of the most critical policy arenas for addressing this crisis, and its monetary-policy decisions have remained out of the reach of judicial review for close to a century. A livable future is still in our grasp—if only the people with power choose to exercise it.