Free DP Download 08 March 2019: Greening Monetary Policy

Tuesday, March 12, 2019

Greening Monetary Policy
Dirk Schoenmaker
CEPR DP No. 13576 | 8 March 2019

While price stability should naturally remain the primary priority of the Eurosystem, a modest tilting to steer its asset and collateral framework towards low carbon assets could reduce carbon emissions in its corporate and bank bond portfolio by over 40%. Such an approach could also lower the cost of capital of low carbon companies in comparison with high carbon companies by 4 basis points. The low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy.

These are the conclusions of new CEPR research. But as the study concludes, that is all technical. The real question is whether central bankers are prepared to ‘cross the Rubicon’ in support of EU climate policies. Similar deliberations have taken place in other sectors. Should auditors examine a company’s integrated report with social and environmental indicators? Or should they stick with the financial part, which is within their professional realm? Should institutional investors include sustainability considerations in their investment policies?


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The 2018 report of the European Commission’s High Level Expert Group on Sustainable Finance recommended incorporating sustainability in the fiduciary duty of investors, which is now put into proposed legislation by the Commission. More generally, the required political space for the European Central Bank to adopt low-carbon criteria seems to be present. The European Council, the Commission and the European Parliament are all committed to the transition to a low-carbon economy. 

If the Eurosystem were to pick up the challenge of greening its monetary policy operations, it would be of utmost importance to do that in full independence. The Eurosystem could adjust the eligibility criteria for assets and collateral in a general way, using a transparent and objective indicator, such as current and future carbon emissions. It should refrain from favouring specific projects or setting sectoral targets, which is an issue for government policy. The EU and the member states can use their multilateral development bank (the European Investment Bank) and national development banks to steer financing towards specific green projects, if they so wish. 


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