Central bank governors argue for carbon neutrality over market neutrality

February 12, 2021|Written by Camilla Schramek|Banque de France, De Nederlandsche Bank, European Central Bank

Two Eurosystem central bank governors called for the decarbonisation of the European Central Bank’s (ECB’s) monetary policy, to bring it in line with EU emissions targets and the Paris Agreement.

In a speech on Thursday at a sustainable finance conference, Banque de France Governor François Villeroy de Galhau was explicit. “Market neutrality should not put a brake on carbon neutrality,” Villeroy said. “I propose to start decarbonising the ECB’s balance sheet with a pragmatic, progressive and targeted approach to all corporate assets whether they be held on the central bank’s balance sheet as purchases or taken as collateral… We can make this decision quickly – by the end of this year – and then implement it in three to five years.”

At a separate conference on the same day, Klaas Knot, Governor of De Nederlandsche Bank, also questioned market neutrality. “What does this neutrality mean if there is a carbon bias in European capital markets because the relative price of carbon emissions is distorted?” Knot asked. “Central banks could explore how, within the boundaries of their mandates, they can redesign their monetary policy instruments to prevent such biases from occurring, and instead contribute to unlocking more green investments.”

The controversial idea that monetary policy must be “neutral” with respect to the functioning of financial markets is an issue of debate within the ECB as the bank conducts a major strategy review – the first to include climate change as a work stream. ECB governor Christine Lagarde, executive board member Isabel Schnabel and several national central bank governors have said that they are willing to question market neutrality. However, Villeroy and Knot are the first to directly call for its abandonment. 

Their views are in direct contrast to those of Bundesbank president Jens Weidmann, who has argued that monetary policy should not be used to pursue climate policy goals.

ECB monetary policy decisions are made by the bank’s Governing Council, which includes all Eurozone national central bank governors as voting members.

Researchers have found substantial bias towards carbon-intensive activities in the ECB’s €257 billion Corporate Sector Purchase Programme, while a Banque de France study shows similar bias in ECB collateral policy.

The ECB is an outlier among central banks in its concern for market neutrality in its monetary policy activities. As a result, the bank’s support for high-emission sectors and activities has attracted growing criticism from climate campaigners.

This page was last updated April 23, 2021

Share this article