Tackling ‘greenflation’ does not pose these risks if a central bank increases interest rates to stem it. The challenge of ‘Greenflation’ is how we can step up investment to the degree which would allow the supply of materials used for new green technologies and products to increase faster and in line with their demand. The ECB can impact the financing conditions and, therefore, the steering of investment towards these activities in two ways. First, in the context of its Assets Purchasing Programmes, by taking a more active approach in steering its asset purchases towards activities and companies which promote investment in new green technologies and products and away from those which do not contribute to the EU’s climate objectives. Secondly, in the context of its collateral framework whereby banks deposit financial assets of high quality as security for receiving liquidity from the ECB, by shifting the rules determining which financial assets are admissible collateral in favour of those financing genuinely green activities and limiting the admissibility of financial assets which contribute to climate change.
The ECB concluded a monetary policy strategy review last July. Its new strategy (to be reviewed again by 2025) includes an action plan to support the EU’s fight against climate change. The first step in that direction is to understand better how exactly climate change, whether through extreme weather events, policies to step up decarbonization and those to develop new green technologies, affect output growth and prices but also how they would affect the financial system through which the policies of the ECB have an impact on the real economy. The ECB’s climate change action contains points on adapting the assumptions and models the Bank uses to forecast macroeconomic developments, based on which its policy decisions are made, to better account for the effects of climate change and related policies (e.g. carbon pricing) on its forecasts.
Moreover, in its new strategy, the ECB committed to taking more actively into account the environmental sustainability of activities financed by assets serving as collateral for its credit operations and/or purchased in the context of the ECB’s corporate asset purchasing schemes, as it has been facing criticisms that these operations have been inadvertently financing economic activities that enhance rather than mitigate activities detrimental for climate change. While moving in the right direction, these commitments had been criticized even before the war in Ukraine broke out, for being way too modest, given the urgency of the EU’s climate objectives.