Download publication

Working Paper

Greening monetary policy

The author proposes a tilting approach to steer the allocation of the Eurosystem’s assets and collateral towards low-carbon sectors, which would reduce the cost of capital for these sectors relative to high-carbon sectors. Central banks have already started to look at climate-related risks in the context of financial stability. Should they also take the carbon intensity of assets into account in the context of monetary policy?

By: Date: February 19, 2019 Topic: Energy & Climate

Central banks have already started to look at climate-related risks in the context of financial stability. Should they also take the carbon intensity of assets into account in the context of monetary policy? The guiding principle in the implementation of monetary policy has been ‘market neutrality’, whereby the central bank buys a proportion of the market portfolio of available corporate and bank bonds (in addition to government bonds). But this implies a carbon bias, because capital-intensive companies tend to be more carbon intensive.

The author first reviews the legal mandate of the Eurosystem. While the primary objective is price stability, the Treaty on European Union allows the greening of monetary policy as a secondary objective. He proposes a tilting approach to steer or tilt the allocation of the Eurosystem’s assets and collateral towards low-carbon sectors, which would reduce the cost of capital for these sectors relative to high-carbon sectors. This allocation policy must be designed so it does not affect the effective implementation of monetary policy.

The working of the tilting approach is calibrated with data on European corporate and bank bonds. We find that a modest tilting approach could reduce carbon emissions in the corporate and bank bond portfolio by 44 per cent and lower the cost of capital of low carbon companies by 4 basis points. Our findings also suggest that such a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Price stability, the primary objective, is, and should remain, the priority of the Eurosystem.

Read about event More on this topic

Upcoming Event

Mar
5
12:30

On gains, losses, and trade-offs: the case of Border Carbon Adjustment

How will the border carbon adjustment be implemented and what will be the implications?

Speakers: Cecilia Bellora, Gabriel Felbermayr, Joost Pauwelyn, André Sapir and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Upcoming Event

Mar
31
12:30

How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Blog Post

Climate risks to European banks: a new era of stress tests

Several European central banks have begun assessing the impact of adverse climate scenarios on banks’ capital. Comparable work at EU or euro area level has evolved more slowly. Supervisors need build up a distinct and more complex type of analysis, and should engage with banks now.

By: Alexander Lehmann Topic: Energy & Climate, Finance & Financial Regulation Date: February 4, 2020
Read about event More on this topic

Past Event

Past Event

Take a chance on me: Sweden considers the Banking Union

This event will discuss if Sweden should join the European banking union and the general state of the union.

Speakers: Fredrik Bystedt, Elena Carletti, Maria Demertzis and Pawel Gąsiorowski Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 29, 2020
Read article More on this topic

Blog Post

Libra as a currency board: are the risks too great?

The Libra Association claims it will be analogous to a currency board regime, but they have overlooked the problems of monetary management that come with it

By: Julia Anderson and Francesco Papadia Topic: Innovation & Competition Policy Date: January 27, 2020
Read article More on this topic More by this author

Podcast

Podcast

Paying for the European Green Deal

The European Commission has presented its Just Transition Fund to help regions still dependent on fossil fuel as they move towards green energy. But where does the money come from and is it enough to make Europe carbon neutral by 2050? Should the EU re-write its fiscal rules to encourage sustainable investment? And should environmentalists be optimistic? Nicholas Barrett asked Simone Tagliapietra and Grégory Claeys.

By: The Sound of Economics Topic: Energy & Climate Date: January 16, 2020
Read article More on this topic More by this author

Blog Post

European green finance is expanding, a discount on bank capital would discredit it

If EU banks are to mobilise a greater share of loans for sustainable projects they will need a reliable policy framework, clear internal performance targets and the relevant skills. A discount on bank capital underlying such assets is neither justified nor likely effective. A comprehensive review of how climate risks are reflected in prudential regulation is nevertheless in order

By: Alexander Lehmann Topic: Energy & Climate Date: January 15, 2020
Read article More on this topic

Opinion

Stability remains key to China

The most concerning aspect for the Chinese economy will still be to hold up domestic demand. The rapidly rising household debt will put further breaks of the households' ability to purchase durable goods

By: Alicia García-Herrero and Jianwei Xu Topic: Global Economics & Governance Date: January 15, 2020
Read article More on this topic More by this author

Opinion

The Green Deal is not just one of many EU projects, it is the new defining mission

The EU has already invested so much of its political capital into the green transition that a failure to deliver would severely damage its legitimacy.

By: Jean Pisani-Ferry Topic: Energy & Climate Date: January 3, 2020
Read article More on this topic More by this author

Opinion

Europe’s Apollo 11 will not be about the moon

The European Green Deal has an ambitious double target to “reconcile the economy with the planet” and to become Europe’s “new growth strategy”.

By: Simone Tagliapietra Topic: Energy & Climate Date: December 13, 2019
Read article More on this topic More by this author

Opinion

Why border carbon adjustment is important for Europe’s green deal

The European Commission President-elect Ursula von der Leyen is pursuing ambitious environmental targets, notably to reach zero net emissions across the EU by 2050. This transition requires pricing emissions to incentivise producers to develop greener alternatives, while avoiding putting domestic producers at a disadvantage.

By: Guntram B. Wolff Topic: Energy & Climate Date: November 27, 2019
Read article More on this topic More by this author

Podcast

Podcast

How to make the European Green Deal work (Part Two)

Nicholas Barrett and Guntram Wolff discuss industrial policy and the social consequences of the green deal with Grégory Claeys and Simone Tagliapietra.

By: The Sound of Economics Topic: Energy & Climate Date: November 14, 2019
Load more posts