Opinion

Is the ECB right to take on climate change?

The real issue here is not that the ECB takes a very sizeable risk by pursuing climate objectives but rather, that it cannot afford not to. And by doing so, it helps establish just how urgent climate change is.

By: Date: November 2, 2021 Topic: European governance

This opinion piece was originally published in the Money Review section of Kathimerini, the Cyprus Mail and by the Cyprus Economics Society and is forthcoming in El Economista.

By far the biggest innovation in the recent monetary policy strategy review of the European Central Bank (ECB) is the emphasis that it puts on climate change issues. The ECB joins other central banks, like the Bank of England, in appreciating that as a big player in the financial system it has at least an obligation to consider the issue.

But can it do more than just consider it? It is not difficult to understand why the ECB wants to be an active player in this fight. Climate change will affect the types and magnitude of investments that are needed. As such it will affect price stability, the main objective of the ECB but also financial stability. Similarly, the risk profile of the assets that the ECB holds in its balance sheet will be affected by climate change and policies to counter it. Therefore, the ECB will at the very least want to try and control for the types of risks that it takes and ideally would want to tilt them in the direction of greater sustainability.

What is less clear however is what it can do about it. In in a recent paper, the ECB outlines an action plan.

It talks first about data. Measuring and gathering data on the effects of climate change in the economy and how policy influences these effects is crucial to our understanding. Then it is about how the euro area and the financial system at large are exposed to climate risks. Do credit ratings adequately reflect those risks? Last come the tools. Models and ways of measuring price stability will need to account for climate considerations that are complex and difficult to track.

The ECB is very ambitious when talking about its role in fighting climate change. But it is important to appreciate two difficulties.

The first is that while the science of climate change leaves little room for doubt, our understanding of the economic impact is, by contrast, minimal. We know the impact of certain policies, but know much less about their cost and indeed how to implement them. Therefore, designing policy paths across decades, the appropriate time frame here, is extremely difficult.

The second is that while central banks no doubt have a role to play in helping with climate change, the real battle has to be fought by other policy makers, and indeed by the public at large, today and in the future.

In the latest World Energy Outlook, in preparation for the COP26 in Glasgow, the International Energy Agency talks about how the goal of net zero emissions is both critical as well as formidable. But it also talks about repeated pledges and implementation gaps. It talks about how current net zero pledges and the policy efforts they require are not in sync and how further delays will make it even more difficult to catch up later. Climate policies are therefore ridden with credibility problems. Problems that are due to its nature, namely being a global public good that requires global coordination, and being subject to the tragedy of the horizons, the inability to make the right investments today that will affect future generations.

Can the ECB contribute to improving this credibility? Or, will the ECB by contrast, suffer the consequences of that lack of credibility, namely see a loss of reputation as others fail to meet climate objectives at the right speed?

In order to be able to answer this, the ECB will have to think very carefully about how it will account for its climate ambitions.

Its monetary policy framework has put a lot of emphasis on defining objectives, explaining what “success” means and the communication required to explain the risks that surround policy outcomes. This accountability framework is an integral part of the credibility on which the ECB relies to achieve its objectives.

How will that work when it comes to climate?  What are the objectives that it can set? Will it be able to achieve them within a predefined policy horizon? And can it realistically accept the cost of failing to achieve objective climate goals that require the cooperation of many policy actors?

Importantly, is there a risk that failure to meet such objectives may actually interfere with its main goal of price stability by damaging its reputation?

The real issue here is not that the ECB takes a very sizeable risk by pursuing climate objectives but rather, that it cannot afford not to. And by doing so, it helps establish just how urgent climate change is.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic
 

External Publication

Europe's path to net-zero

Fostering the industrial component of the European Green Deal: key principles and policy options.

By: Simone Tagliapietra and Reinhilde Veugelers Topic: Green economy Date: December 3, 2021
Read about event More on this topic
 

Past Event

Past Event

European Green Deal beyond the Brussels climate bubble

How can the European Green Deal be implemented beyond Brussels?

Speakers: Maciej Bukowski, Sarah Coupechoux, Zsolt Darvas, Susi Dennison, Michal Horvath, Lara Lázaro, Marie Le Mouel, Michael Losch, Giulia Novati, Davide Panzeri, Thomas Pellerin-Carlin, Nolan Theisen, Shahin Vallée, Marc Vanheukelen and Georg Zachmann Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 2, 2021
Read about event More on this topic
 

Past Event

Past Event

Role of innovation in decarbonisation

A fireside conversation with Eni CEO Claudio Descalzi on decarbonisation.

Speakers: Claudio Descalzi and Guntram B. Wolff Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 29, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

COP26: global stocktake and what’s next

What happened and what didn’t happen at COP26?

By: The Sound of Economics Topic: Green economy Date: November 25, 2021
Read about event More on this topic
 

Past Event

Past Event

COP26: global stocktake and what’s next

In this episode of the Sound of Economics Live, join us as we contribute to the global stocktake of the climate summit, to foster a clearer understanding of the game changers and the missed opportunities.

Speakers: Li Shuo, Diederik Samsom, Simone Tagliapietra and Laurence Tubiana Topic: Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 25, 2021
Read article More on this topic More by this author
 

Parliamentary Testimony

Dutch Parliament

The future of the stability and growth pact

Testimony given to a Tweede Kamer der Staten-Generaal roundtable discussion on the future of the stability and growth pact.

By: Guntram B. Wolff Topic: Dutch Parliament Date: November 24, 2021
Read article
 

External Publication

European Parliament

Decarbonisation of energy

Determining a robust mix of energy carriers for a carbon-neutral EU

By: Ben McWilliams, Georg Zachmann, Franziska Holz, Alexander Roth, Robin Sogalla, Frank Meissner and Claudia Kemfert Topic: European Parliament, Green economy, Testimonies Date: November 22, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read about event More on this topic
 

Past Event

Past Event

Covid recovery and the green transition: What can promotional banks do?

What is the role of promotional banks in financing the green transition?

Speakers: Sophie Barbier, Maria Demertzis, Ricardo Mourinho and Lucinio Muñoz Topic: Green economy Date: November 18, 2021
Read article More on this topic
 

Blog Post

Goodbye Glasgow: what’s next for global climate action?

After COP26, and as the debate on whether Glasgow represents a success or a failure dies down, what next for global climate action?

By: Klaas Lenaerts and Simone Tagliapietra Topic: Green economy Date: November 18, 2021
Read article More on this topic More by this author
 

Opinion

Glasgow: a clearer sense of direction but with no hard numbers

Global climate action is visibly accelerating however the conference failed to deliver on the hard numbers.

By: Simone Tagliapietra Topic: Green economy Date: November 15, 2021
Read article Download PDF More on this topic
 

Book/Special report

European governance

Instruments of a strategic foreign economic policy

Study for the German Federal Foreign Office produced by Bruegel, the Kiel Institute for the World Economy and DIW Berlin.

By: Katrin Kamin, Kerstin Bernoth, Jacqueline Dombrowski, Gabriel Felbermayr, Marcel Fratzscher, Mia Hoffmann, Sebastian Horn, Karsten Neuhoff, Niclas Poitiers, Malte Rieth, Alexander Sandkamp, Pauline Weil, Guntram B. Wolff and Georg Zachmann Topic: European governance Date: November 12, 2021
Load more posts