Can the European Central Bank effectively implement green policies as Europe faces widespread fires?

The European Central Bank (ECB) has been grappling with the challenges of supporting the green transition while managing high inflation. In July 2022, the ECB announced new limits on the proportion of high-carbon assets that financial institutions could use as collateral, marking a step towards environmental promotion and climate protection. However, the ECB's interest rate policy has been making it more expensive to invest in green technologies, particularly renewable energy.

Soaring gas prices after Russia's invasion and the potential for future fossil fuel price shocks are significant contributors to inflation. The ECB's corporate bond portfolio, amassed between 2016 - 2022, was criticized for favoring environmentally harmful companies. In an attempt to address this bias, a green tilting policy was introduced.

The ECB's strategy review is complete, and it's now time for action. A manifesto signed by over 40 NGOs calls for the ECB to implement three policies to support the green transition: green targeted longer-term refinancing operations, collateral framework reform, and green tilting of the corporate bond portfolio. The ECB's 2021 climate plan included two key policy measures, one of which was the green tilting policy.

However, the ECB's governing council decided not to proceed with the green tilting policy in July 2024, rendering it ineffective. The ECB stopped buying new corporate bonds altogether in July 2023, further undermining the policy's impact. The ECB's current collateral framework has an inherent carbon bias, favoring high-polluting companies.

The ECB's updated strategy statement, published last week, includes a commitment to considering the implications of climate change and nature degradation for monetary policy and central banking. The ECB works on aligning its asset purchases and collateral frameworks with climate objectives and promotes the digital euro as part of a broader strategy for resilience and inclusiveness in the financial system, which indirectly supports sustainability goals.

Despite these efforts, the ECB ranked fourth out of twenty in the 2024 Green Central Banking Scorecard, with a rating of 87 out of 130. Implementing the policies advocated by the NGOs would help the ECB move from hindering the green transition to supporting it, and would also make it more effective at controlling inflation by reducing the eurozone's dependence on imported fossil fuels. The ECB's strategy statement shows support for the global scientific consensus on climate change.

Can the European Central Bank effectively implement green policies as Europe faces widespread fires?