Author: Hee-Yul Chai(Kyonggi University), Sehoon Kwon(Sangmyung University), Jinill Kim(Korea University), Donghun Joo(Hanyang University), Sang Buhm Hahn(Kyonggi University)

<Abstract>

We justify the Bank of Korea's active role in the transition to a low-carbon economy in terms of economic rationale, legal appropriateness, and adherence to central bank principles such as transparency, independence, accountability, and market neutrality, as well as the mandates outlined in the Bank of Korea Act. To ensure price stability, monetary policy should be conducted focusing on policy credibility to prevent physical risks from inflation expectations. Additionally, it is essential to establish a monetary policy framework harmonizing it with credit policy to promote the transition to a low-carbon economy while minimizing implementation costs. To this end, we propose developing an economic forecasting model that incorporates climate change considerations and establishing the System for Integrated Environmental and Economic Accounting (SEEA). To address the impact of climate change risks on financial stability we recommend creating a climate change stress test model and reinforcing macroprudential policy role of the Bank of Korea. As credit policy tools for supporting the transition to a low-carbon economy, we suggest a green bank-intermediated lending support facility, expansion of eligible collaterals, haircut adjustment of collateral securities, and the implementation of a climate response bond purchase program. We also review the strengths and weaknesses of each policy tool.