Produced by NEF and 16 partner organisations.
In July 2021, the European Central Bank (ECB) concluded an 18-month review of its monetary policy strategy, the first since 2003. Given its role in the EU treaties, responding to pressure from civil society and mounting scientific evidence of the threat posed by climate collapse, the ECB recognised the need to incorporate climate considerations into its operations. The Bank has outlined a detailed roadmap for its climate-related actions, marking a major shift in its thinking. However, while the roadmap is welcome, it fails to achieve the necessary ambition and urgency if the ECB is to fully integrate climate risks and impacts into its operations and support the low-carbon transition.
In designing policy to meet its primary, secondary and financial stability mandates, the ECB should make it clear that: “Price stability, financial stability, and job security are impossible on a burning planet of social unrest. “
If anything, the current energy price crisis has pushed inflation to record levels since the birth of the euro, only adding to the urgency for the ECB to act forcefully to support the EU’s energy transition. In fact, expanding the supply of domestic renewable energy will significantly reduce the EU’s impact on price volatility of imported energy sources such as gas and oil.
In this context, as Isabelle Schnabel alluded to in a recent speech, we advocate caution when it comes to the ECB’s potential response to a prolonged rise in energy prices. 6 Until then, the ECB should carefully assess the impact of this increase in energy prices. The cost of shifting energy transition investments, which are more sensitive to the cost of capital than amortized fossil fuel assets.
In the face of the climate and energy crises, it is time for the ECB to acknowledge the inadequacies of its current policy toolkit and explore ways to coordinate price stability and support the low-carbon transition.
The Bank must recognize that voluntary, market-led approaches are insufficient to divert capital flows away from harmful investments, which will ultimately lead to environmental, social, and economic disaster. It must use its power to steer European finance in line with international and European climate and environmental goals. Therefore, the Bank should follow a core set of principles to guide its policy decisions. We also propose 5 sets of recommendations that the ECB can implement to align its policies with the transition path.
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