Calls grow for targeted ECB green discount rate

Calls are growing for the European Central Bank (ECB) to incentivise bank lending for energy-saving housing renovations by offering a green discount rate through targeted longer-term refinancing operations (TLTROs).

The proposal would grant a green discount rate to banks on their portfolio of loans destined for energy efficient housing renovations, extending the duration of loans towards the average maturity of the projects financed. Banks could be further incentivised by an additional discount for those reaching a lending threshold for energy efficient renovation, in line with national objectives for housing renovations.

The move comes as fossil fuel costs drive EU inflation to 8.6% and the European Commission (EC) prepares an emergency plan for the complete cut-off of Russian gas imports this winter. Buildings are responsible for about 40% of total EU energy consumption, with the vast majority built before 2001 and many highly inefficient in terms of energy use.

A 2019 EU study found 34mn Europeans are unable to adequately heat their homes, largely due to energy wastage, and that number is likely to have grown substantially following the Russian invasion of Ukraine and associated increases in fossil energy costs. A 2020 EC initiative attempted to counter this problem by doubling energy efficiency renovation rates and identified an investment gap of around €275bn per year.

However, while bank lending is seen as an effective response due to its decentralised and elastic nature, it is often not profitable for banks to offer renovation loans at affordable rates given the high transaction costs for small loans. A public consultation on the EC renovations programme identified a lack of bank financing as the main obstacle to building renovations, with 92% of respondents mentioning it as a barrier.

First introduced by research and advocacy group Positive Money Europe, the proposal for renovation TLTROs has rapidly received wide support from civil society groups, climate campaigners and European parliamentarians. It is one of the core demands of the Unlock campaign recently launched by a collaboration of 11 European NGOs and supported by members of the European Parliament.

A green discount rate was also the subject of an open letter from leading experts in banking, monetary policy and green finance to the ECB’s governing council ahead of its meeting on 9 June.

Similar to targeted green finance programmes operated by the Bank of Japan and the People’s Bank of China, a green discount rate is also supported by ECB president Christine Lagarde. Speaking at last month’s Green Swan conference, Lagarde made clear that she is “not giving up” on including green lending facilities in the ECB’s monetary policy toolkit, implying opposition from other members of the governing council.

“Japan is looking at it, China is doing it. Why wouldn’t we have an open mind about it? I know it is not squarely in the mandate and it is not necessarily in what we consider as the prime objective but, you know, if we don’t try then we have no chance of succeeding. So, count on me,” she said.

Earlier this week the ECB’s deputy director for general market operations said the central bank is still considering the policy and that its decision would be informed by the availability of necessary data from all 19 jurisdictions within the euro area.