What role does the ECB play in addressing climate change?

Olimpia Fontana

March 2024

Climate change has disruptive consequences not only on our lives, but also on monetary policy. Understanding the impact of climate change requires analysing the direct link between natural events and economic activity, the indirect effects of climate risks on monetary policy, and how central banks have to take these into account when preparing their response through monetary policy in the medium term. On the one hand climate change affects monetary policy through physical and transition risks, while the two main channels through which climate change influence monetary policy are the transmission mechanisms and the natural rate of interest. On the other, central banks can take proactive measures aimed at “greening” their portfolios. The ECB has recently begun to incorporate climate change considerations into its operations, while respecting the limits of its mandate. However, other factors will contribute to the direction of monetary policy against climate change – the ambition of fiscal policies and regulators and the capacity of the supply side to accommodate the transition.

Keywords: green monetary policy, ECB, carbon price, climate-related risks, greenflation

Olimpia Fontana is Mario Albertini Fellow at the Centro Studi sul Federalismo and Research Fellow at Università Cattolica del Sacro Cuore

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