Our planet is heating up at an unprecedented rate. A recent study by over 50 renowned scientists revealed that human-induced global warming is progressing at a rate of 0.26°C per decade – the fastest pace ever recorded. The primary culprit behind this alarming trend is fossil fuel emissions, which account for approximately 70% of all greenhouse gas (GHG) emissions and are the main driver of climate change.

An often-overlooked aspect is the role that our current economic and financial systems play in exacerbating the climate crisis. These systems, which favour extractivism and direct funding towards highly polluting sectors, significantly contribute to the worsening climate situation. For instance, a recent report by the Italian campaigning group ReCommon revealed that the GHG emissions associated with the largest banks in G7 countries total 2.7 billion tonnes. This figure is higher than the combined emissions of Germany, Italy, the UK and France combined.

The climate-economy cycle

Our economy and the climate crisis are locked in a dangerous cycle. Today’s extractive economic system fuels environmental degradation and accelerates global warming. In turn, the repercussions of the climate crisis – extreme climate events like heat waves, floods and droughts – are disrupting our supply chains and agricultural sector, causing financial and economic instability. 

In the US, 2023 was a historic year, with 28 weather and climate disasters, surpassing the previous record of 22 in 2020, with a cost of at least $92.9 billion.

These phenomena are becoming so frequent that a new term – ‘climateflation’ – has been coined to describe price hikes linked to the disruptions caused by the increased occurrence and size of extreme weather events. For example, in February 2024, we witnessed an unprecedented surge in global cocoa prices due to the negative effects of dry weather on crops in West Africa. Similarly, the long warm and dry summer in much of the Mediterranean caused damage to olive trees and a poor harvest, which in turn triggered a sharp increase in olive oil prices.

Breaking the cycle

Breaking this vicious cycle is not only possible but imperative – our planet, societies and even economies cannot wait any longer. To make this happen, however, EU political leaders need to seriously commit to an economy that is sustainable for people and the planet. Central banks – as public financial institutions – are key players in all this.

On 6 June, the European Central Bank (ECB) announced its first interest rate cut. This move is a good first step, especially because sectors like clean energy have been disproportionately affected by the high interest rates of recent years due to their sensitivity to credit costs.

At Positive Money, we believe that this should be just the beginning. The ECB needs to establish a more significant and comprehensive policy framework to facilitate Europe’s economic transition. We propose the implementation of a dual rate system. This system would offer lower interest rates benefiting crucial sectors for our future, such as renewable energy and energy efficiency.

By adopting this approach, the ECB would not only be fulfilling its secondary mandate of supporting the Union’s environmental objectives, but also laying the foundation for a more sustainable and stable economy in the long run.

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