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The ECB’s green agenda

Debates have emerged recently on central banks’ role in mitigating climate change, or at least on increasing their awareness of their environmental impact. The February 2021 CfM-CEPR survey asked members of its European panel of experts about measures the ECB could take to address the environmental impact of its bond-purchasing policies. The majority of the panel supports active measures to use the ECB’s bond-purchasing programme to either exclude industries with negative environmental impact or bias its portfolio towards green investments. An additional 30% of the panel believes that the ECB should rebalance its portfolio to correct its current bias in favour of polluting industries. However, a majority also believes it would be inappropriate to change the ECB’s mandate to reflect green objectives.

Concerns about climate change have been central to the economic policy discussion in recent decades, with increasing urgency. More recently, debates have emerged on central banks’ role in mitigating climate change, or on increasing their awareness of their environmental impact (Brunnermeier and Landau 2020). The February 2021 CfM-CEPR survey asked members of its European panel of experts about measures the ECB could take to address the environmental impact of its bond-purchasing policies, in light of some suggestions that the bonds the central bank purchases overweigh industries that have negative environmental impact. The panel was also asked whether it would consider changing the ECB’s mandate to contain environmental targets.

Concerns about the ECB’s environmental impact

The ECB has been on the forefront of thinking among central banks and climate policy is a central “work stream” of the Bank’s monetary policy review this year.1 

The ECB’s existing policy states that environmental externalities are best tackled by taxation, but that there is still potential scope for monetary policy to factor environmental concerns into its policy considerations. The ECB has already been doing so, having purchased green bonds under its asset purchase programmes, amounting to 3.5% of its portfolio (before the Covid-19 pandemic). The ECB’s annual report from 2019 states that “all authorities need to reflect on the appropriate response to climate change and related risks in their own area of competence” (ECB 2020).

The main argument for central bank action in this regard has been that the central bank’s actions are not ‘market neutral’. That is, the types of bonds typically purchased through central banks’ quantitative easing policies tend to be from larger firms that do more environmental harm on average than does the average firm. In this regard, the quantitative easing may be an implicit subsidy for fossil fuel and other ‘brown’ industries. 

In a recent lecture at the 2021 American Economic Association meetings, Monika Piazzesi presented work in progress (Piazzesi et al. 2021) that shows that the ECB’s bond portfolio is significantly different from the universe of outstanding bonds in the market and overweighs industries that are heavier in emissions (manufacturing, utilities, and transport), as these industries issue more bonds than do other sectors. She argues that the ECB should restore market neutrality by consciously tilting its portfolio towards green industries. Paul De Grawe goes further2 and argues that the ECB could actively tilt its portfolio towards green bonds and do so without stoking inflation.

Ferrair and Nispi Landi (2020) model a temporary green quantitative easing (QE) in a DSGE model and concur that this policy could be effective in mitigating emissions, but this requires imperfect substitutability between bonds of ‘green’ and ‘brown’ firms (an assumption also made in Piazzesi et al.’s analysis). Further, they find that green QE can only have a small positive impact on the environment because it cannot affect the stock of atmospheric carbon, only the flow of emissions.

In recent speeches, ECB President Lagarde has supported this view,3 arguing that “we have to ask ourselves as to whether market neutrality should be the actual principle that drives our monetary policy portfolio management”. Isabel Schnabel, an ECB executive board member, goes beyond market neutrality and argues for excluding bonds from the Bank’s portfolio that are inconsistent with the EU’s target to be carbon-neutral by 2050. President of the Bank de France, François Villeroy de Galhau, also supports this idea,4 calling for “decarbonising the ECB’s balance sheet in a pragmatic, gradual and targeted manner for all corporate assets, whether they are held on the central bank’s balance sheet or taken as collateral”.

Other central bankers are less supportive of this shift. Jens Weidmann, president of the Bundesbank, wrote in the Financial Times that “it is not up to us to correct market distortions and political actions or omissions”,5 adding that “the market price of carbon” is an issue for governments to address — not central banks.” Otmar Issing, the Bank’s former chief economist has written that “[c]entral bankers who would assume responsibility for tackling climate change are acting out of pretention, and could well undermine the very independence upon which their institutions rely. Central banks were not made independent so that they could extend their own mandates. And where environmental issues are among their secondary objectives, central banks should warn against exaggerated expectations regarding their contribution. Making themselves publicly accountable beyond their limited capability in this field must lead to disappointment and undermine their reputation.”6 

There are also reasons to be sceptical whether a change in the ECB’s portfolio will have much more than a symbolic effect on a transition to climate neutrality. Hassler et al. (2020) predict that reducing the price (and thus the financing costs) of green technologies alone is not an effective substitute for emission pricing. This is because green and brown technologies are not sufficiently substitutable for lower priced green technologies to ‘outcompete’ brown ones.

Beyond market neutrality, climate change itself may have important implications for price stability. As Volker Wieland pointed out in his 2020 presentation to the ECB Forum on Central Banking,7 increased energy prices due to CO2 pricing may lead inflationary pressures and have a negative impact on growth, as in a traditional cost push (see also Garnadt et al. 2020.) These factors may affect the type of policies the ECB needs to pursue to fulfil its targets of medium-term price stability while attempting to ensure full employment. 

In this month’s survey, members of the CfM-CEPR European panel of experts were asked about their views on policies that have been proposed to address the environmental impact of the ECB’s bond-purchasing programme. 

Question 1: Which of the following actions is the most advisable approach for the European Central Bank to address the environmental impact of its bond-purchasing policies?


Thirty-six panellists responded to this question. More than half the panellists supported some active measures to use the ECB’s balance sheet to support climate objectives (biasing the portfolio to green industries, banning purchases of bonds of firms who currently have a negative environmental impact, or of those who have no plan to improve by 2050). An additional 30% of the panel supports aiming for market neutrality – this was also the single most popular answer. A minority of 14% rejected any change in policy regarding climate change. The minority view was strongly held – this was the group that expressed most confidence in its response. 

Supporters of ECB action suggested that the ECB should help mitigate climate change and is able to do so even within its current remit. Robert Kollmann (Université Libre de Bruxelles) opined that “[s]aving the environment and stopping climate change is an existential challenge for humanity. All countries and all institutions, including the ECB, must contribute to this goal.” Ramon Marimon (European University Institute and UPF-Barcelona GSE) suggested that “the ECB may well take into account that some firms have a (well documented) negative environmental externality and stop purchasing their bonds.” Alexander Ludwig (Goethe University) sought to dismiss concerns regarding central bank independence, positing that ECB action “does not undermine independence of the central bank, as it only refers to making its portfolio selection problem consistent with EU policy”.

The panellists’ comments paint more consensus, and more middle ground, than there may seem at first glance. In fact, many supporters of an active ECB approach on climate change had substantial caveats in their support for ECB action. The respondents’ most notable reservations regard the effectiveness of ‘green’ monetary policy. Costas Milas (University of Liverpool), who supported an active bias of the ECB’s portfolio towards green investments, pointed out that “there appears to be some inherent contradiction in the whole debate. Indeed, the ECB’s QE programme by definition will be short lived. So it appears rather futile for the ECB to support green technology now (or at least in the short run) only to ‘pull the green plug’ later on when QE is abandoned.” David Miles (Imperial College London), who supported market neutrality, also questioned the exact role of monetary policy in achieving environmental objectives: “The best way to address environmental issues is by setting an appropriate price for carbon which reflects the cost of the externalities. Using monetary policy seems like fourth best as a policy and unlikely to do much good.” John Van Reenen (London School of Economics) echoed this sentiment: “Monetary authority can only have a marginal impact on climate change. [The] main issue is raising carbon price, subsidising green innovation and better regulation.”

Concerns regarding the political implications of such a move were also raised. Patrick Minford (Cardiff Business School) remarked that “it is important that monetary policy is independent of politics”. Sir Charles Bean (London School of Economics) elaborated on the political sensitivities underlying this issue: “I would be more than happy to see the ECB (and other central banks) skew their operations to foster the greening of the economy and to meet climate objectives. But the initiative to do this should in the first instance come from the appropriate political authorities. Central banks should only stray beyond their mandates if they have the support of the political authorities, as otherwise they lack the necessary democratic legitimacy.”

Furthermore, respondents discussed the potential negative impacts of market-neutral policy. John Hassler (IIES, Stockholm University), advocating for no change in policy, opined that “[o]ne might argue that a neutral stance with respect to temporary purchases and sales of different types of assets is reasonable. However, I think the proponents of green monetary policy are after a more permanent money financing of investments in green projects.” Regarding the reduction of bold holdings in polluting industries, he raised the point that “the fossil industry that is most vulnerable to emission prices is coal power, but the stock market value of this industry is almost gone already, in both [the] EU and the US.” He further argued that “financial stability is also threatened if a green bubble is building up”, and that “the most effective way to reduce financial risk is to make sure risky assets are held by risk tolerant agents, e.g. pension funds rather than banks. Policies that might lead to a more concentrated ownership of fossil assets could therefore be a risk to financial stability.”

Question 2: Would you support changing the ECB’s mandate to incorporate the EU’s target of carbon neutrality by 2050, if such a change is deemed legally necessary to adopt your preferred approach?



Forty members of the panel responded to this question. Although most panellists supported taking some action in the first question, only a minority is willing to go so far as to change the ECB’s mandate for this objective. 

One panellist who does support changing the ECB’s mandate is Wendy Carlin (University College London), who voiced her support unambiguously: “If such a change is necessary, then the mandate should change. Climate change is non-negotiable.” 

However, many more panellists who supported climate action in the first question would not go so far as to support a change in mandate in the second. Ricardo Reis (London School of Economics), who supports a move to market neutrality, pointed out that current research is unclear on what constitutes an effective ‘green mandate’ for central banks: “I think incorporating carbon targets for central banks may eventually be a good idea. But I'm not sure how I would do it right now in an effective way, given what I know of research in the area.” Agnès Bénassy-Quéré (University Paris 1 and Paris School of Economics), who supports a ban on bond purchases from industries with no clear plan to get to zero emissions by 2050, raises a different concern regarding the role of central banks: “Carbon neutrality is an objective for governments, not for central banks. The latter should draw the consequences of such policies for price stability and financial stability.” Ramon Marimon, who also supports banning non-green bond purchases, directly attacked the slippery slope argument that could arise from a change in mandate: “Then we should also incorporate an unemployment target (e.g. not to purchase bonds of firms that fire workers), a health industry target, you name it. This is not, and should not be, the job of the ECB or any independent central bank.”

Finally, panellists who were unsupportive of a change in ECB policy were naturally opposed to changing its mandate for this purpose. Volker Wieland (Goethe University Frankfurt and IMFS) argued that environmental goals can (and should) be achieved without changing the mandate and by use of other policy means: “Achieving carbon neutrality of the EU economy by 2050 and achieving price stability in the euro area in the medium are two completely different objectives that require deploying different policy tools and can be achieved independently of each other.” John Hassler laid out a similar line of reasoning: “The key tool for climate policy is the EU ETS. Additional tools need to be used for dealing with, e.g., distributional consequences of climate policy and climate change. Also here, monetary policy is not the right tool and ECB not the right institution to deal with these issues.”


Brunnermeier, M K and J-P Landau (2020), “Central banks and climate change”,, 15 January.

ECB (2020), ECB Annual Report 2019.

Ferrari, A and V Nispi Landi (2020), “Whatever it takes to save the planet? Central banks and unconventional green policy”, ECB Working Paper 2500.

Garnadt, N, V Grimm, and W H Reuter (2020), “Carbon adjustment mechanisms: empirics, design and caveats”, German Council of Economic Experts Working Paper 11/2020.

Hassler, J, P Krusell, C Olovsson, and M Reiter (2020), “On the effectiveness of climate policies”, Working paper.

Piazzesi, M, M Papoutsi and M Schneider (2021), “How green is unconventional monetary policy?”, presented at JEEA-FBBVA Lecture at the ASSA 2021(see summary in Julia Wdowin’s Economic Observatory note here).


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