Climate-related inflation requires ECB response, report finds

September 23, 2022|Written by Graham Caswell|European Central Bank

Climate-related inflation associated with fossil fuel dependency and changing weather patterns requires an end to European Central Bank (ECB) support for carbon extraction and the introduction of new lines of green finance, according to a new report. As both the causes and consequences of the climate emergency add to the cost of living crisis, the report from research and advocacy group Reclaim Finance calls for the central bank to act on its mandate and support EU efforts to reduce emissions.

The paper examines how reliance on fossil fuels and physical climate impacts have combined in current inflation rates. Pointing to both the ECB’s primary mandate of price stability and secondary mandate supporting EU objectives, it argues that the ECB is compelled to act in support for a clean energy transition.

“The ECB cannot keep on supporting the companies driving the climate and inflation crises, nor continue to ignore the EU’s urgent need for transition funding,” said author Paul Schreiber. “Failure to act could breach the central bank’s mandate and lead to historic financial turmoil as climate change and fossil fuel supply shocks intensify.”

The report examines three aspects of climate-related inflation, previously identified by ECB board member Isabel Schnabel: fossil fuel dependency, physical climate impacts, and short-term supply bottlenecks for key materials required for the green transition.

It recommends that fossil fuel developers are excluded from ECB asset purchase programmes and from the collateral framework. It calls for a dual rate green lending facility to support building renovation and sustainable energy and also suggests that the ECB purchase climate or “just transition” bonds issued by the European Investment Bank and EU member states.

“Inflation has its roots in climate breakdown and our dependence on fossil fuels, and can be managed if they use their tools for climate action,” said Reclaim Finance founder and director Lucie Pinson. “It is by taking strong measures to support the energy transition that the ECB can fulfill its primary mandate and manage inflation. Its timid actions on fossil fuels must urgently give way to a policy that sends a clear message to private actors: the message that both companies developing new fossil fuel projects and those providing the finance must gradually be excluded from the ECB’s support measures.”

This page was last updated September 28, 2022

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