Why central bankers preach good and practise bad when it comes to the climate
COP28, the annual UN Climate Change Conference and a key global decision-making forum on climate issues, is concluding on 12 December in Dubai. It’s widely acknowledged that major players in the climate scenario, such as governments – not to mention oil and gas companies – need to intensify their efforts to ensure the planet’s survival. It’s becoming increasingly evident that market forces can transform climate ambitions from just wishful thinking into a concrete reality. But what role does central banking, specifically the European Central Bank (ECB), play in this? Can ECB policies contribute to a greener world? The simple answer is yes. In our blog and educational video, we deep dive into the relationship between the ECB and the climate change battle. We believe that understanding the influence of central banks is crucial for climate activists and anyone keen to understand the connection between nature and finance.
This year’s COP28, noteworthy for the significant presence of oil industry lobbyists, began with the establishment of a climate crisis damage and loss compensation fund to assist developing nations.
On the summit’s first day, five countries and the EU pledged over $420 million. France and Italy each committed €100 million ($109 million), with more contributions arriving by the first weekend, totaling around $700 million.
The prime minister of Barbados, Mia Mottley, recently opened the ’finance day’ at the UN climate conference with an effective statement: ’Unless we urgently make decisions, we risk the disappointment of unmet expectations, much like every parent experiences’.
Prime Minister Mottley proposed taxes to boost climate funding, such as a 0.1% tax on financial services and a 5% tax on global oil and gas profits.
The financial sector is increasingly being scrutinised for its environmental impact. However, the world of central banking, despite its potential as a game-changer, has not been effectively proactive in supporting the green transition.
The ECB’s role in climate change
The ECB has previously acknowledged the importance of climate-related issues, stating that a faster green transition would benefit the entire economy. More recently, Frank Elderson, a member of the ECB’s Executive Board, has recognized that climate and environmental crises affect economic volatility, influencing monetary policy, inflation and economic growth.
This perspective is crucial from both environmental and climate points of view. However, central bankers’ actions don’t always align with their positive statements. In other words, when it comes to the climate, central bankers preach good and practise bad. Let us explain why.
Central bankers preach good and practise bad
Broadly speaking, monetary policy decisions aim to control price inflation, a primary mandate of the ECB. However, the ECB is not tackling the reasons why climate factors are influencing global and Eurozone prices. Our reliance on fossil fuels has led to fossilflation, where energy prices surge due to geopolitical tensions or decisions by oil-producing countries. Similarly, climateflation occurs when extreme weather events drastically increase food prices.
The ECB’s interest rate policies do not effectively address these issues. Instead, they pose challenges to the green investments crucial for tackling the climate crisis. This is mainly because such projects require significantly large investments. Additionally, many companies in this sector negotiate long-term contracts, setting energy prices well before project development begins.
As the ECB acknowledges the need to incorporate climate and environmental considerations into its responsibilities, including banking supervision and monetary policy, it should also expand and refine its tools to boost the green transition. After all, what kind of economy can thrive on a dying planet?