Why the Fed and ECB Parted Ways on Climate Change The Politics of Divergence in the Global Central Banking Community

Central bankers form a global policy community that for several decades has been characterized by a high degree of convergence in terms of policy tools, frameworks, and objectives. However, in recent years, climate change has emerged as a topic of clear-cut divergence—most strikingly between the historically similar European Central Bank (ECB) and U.S. Federal Reserve (Fed). We develop a theoretical framework based on Finnemore and Sikkink’s norm life cycle model, to describe how new norms are created and become influential in the context of domestic and international pressures. In an initial stage of norm emergence, broad support in the EU for climate policy and persuasive policy entrepreneurs helped push the ECB to endorse new climaterelated norms. By contrast, domestic socio-political polarization on climate policy led the Fed to avoid the topic. A second phase of norm cascade was marked by the founding of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). While the global spread of climate-related norms began to exert pressure towards convergence, the Fed did not adopt the ECB’s more ambitious policies. Given the persistent differences in domestic political pressures, it seems unlikely that the divergence will disappear soon.