While the Fed’s mandates have historically been financial in nature, recently, political/social mandates have also been imposed upon it. One of these is combatting climate change. It’s a puzzle to us how the Fed – which controls a portion of the interest rate curve and can encourage or discourage bank lending but only in the most general sense – is supposed to combat climate change. Its tools are not suitable for that purpose.
However, one of its tools – jawboning about hikes in short term interest rates – has inflicted considerable damage on the Green Economy,, by slaughtering the stocks of electric vehicle, battery, solar, wind, and other alternative power companies. Of course this is not a deliberate act. The fact is, these companies are light on profit, including Tesla. Many have never made money. Some never will. Green stocks are considerably ahead of the development of the green economy, which as a whole has not demonstrated robust, non-subsidized profits at the project level yet.
The decline in green energy stocks is not trivial. These companies need to be popular, so they can continue to raise capital to fund renewable energy. Without capital, projects cannot move forward.
There is one light at the end of the tunnel however, which will be anathema to consumers: much higher energy prices. As energy prices rise around the world, energy projects of all types – green and dirty – reach profitability faster. Profits help attract capital.
For the moment, though, life is going to be tougher for the renewables space, contra to the new political opinion that the Fed needs to combat climate change. This outcome should spark a debate about whether the Fed should be the instrument of this endeavor, and if so, how.