Climate change, carbon prices, and the role of the ECB's monetary policy

Olimpia Fontana

Chapter 4 in Central Banking, Monetary Policy, and the European Central Bank, 2025, pp 78-98 from Edward Elgar Publishing

Abstract: Climate change has disruptive consequences not only on our lives but also on monetary policy. Understanding the impact of climate change requires analysing the direct link between natural events and economic activity, the indirect effects of climate risks on monetary policy, and how central banks have to take these into account when preparing their response through monetary policy in the medium term. On the one hand, climate change affects monetary policy through physical and transition risks, while the two main channels through which climate change influences monetary policy are the transmission mechanisms and the natural rate of interest. Conversely, central banks can take proactive measures to “green” their portfolios. The ECB has recently begun incorporating climate change considerations into its operations while respecting the limits of its mandate. However, other factors will contribute to the direction of monetary policy against climate change – the ambition of fiscal policies and regulators and the capacity of the supply side to accommodate the transition.

Keywords: Green monetary policy; ECB; Carbon price; Climate-related risks; Greenflation (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035324262
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