European Central Bank (ECB) president Christine Lagarde has firmly placed climate change within the central bank’s primary mandate of maintaining price stability, calling for its full incorporation into monetary policy.
In one of a series of blog posts published by the ECB to mark Cop27, Lagarde contrasted the inflationary effects of extreme weather events with the deflationary effects of renewable energy supplies, saying that “if we do not account for the impact of climate change on our economy, we risk missing a crucial part of the overall picture”.
“At the ECB, our primary objective is to keep prices stable,” Lagarde said. “To deliver on this core responsibility, we need the full picture on all factors affecting inflation so that our policies remain effective.” She made clear that climate change is one of those factors, pointing to its widespread economic effects. “Our job of preserving price stability must include further work on better understanding how climate change affects our role,” she said.
Lagarde wants to see climate change integrated into all ECB models, data, projections and analyses, and concluded that “ultimately, we need to ensure that our monetary policy accounts for the impact of climate change”.
Climate change and price stability was also the topic of another blog post in the series. Written by the head of the ECB’s climate change centre and two senior ECB economists, the post outlines how the green transition supports price stability.
“For central banks globally, fighting climate change and fighting inflation can go hand in hand,” the authors say, while acknowledging that “the overall impact of the green transition on inflation is highly uncertain and depends on many factors, including the climate actions taken and the policy responses made”.
Gradual relative price changes caused by carbon taxes do not inevitably result in higher headline inflation, they argue, especially when accompanied by green technological advances and higher energy efficiency. However, increasing the share of renewables can reduce total energy prices in the long run, they add, while also supporting energy security.
In contrast, failing to reduce emissions poses serious risks for price stability. “Climate extremes such as droughts or floods can damage infrastructure, ravage harvests, and disrupt supply chains. This can affect the prices of key products and drive inflation volatility.”
This page was last updated November 14, 2022
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