ECB should strive for a more inclusive green transition, thinktank says

Key points

• A Positive Money paper argues that the ECB should address inequality alongside climate risk, rather than treating the green transition primarily as a question of financial stability.

• Decarbonisation policies and energy-price shocks can fall disproportionately on low-income households, workers and regions dependent on carbon-intensive industries, potentially worsening existing inequalities.

• The authors say an inclusive green transition supports, rather than conflicts with, the ECB’s core mandate, as climate change is already contributing to price instability.

• They recommend closer ECB coordination with other policymakers, alongside dual interest rates, more data and greater diversity in the bank’s staff and leadership.

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The European Central Bank (ECB) can contribute to a just transition by supporting both green and inclusive economic policies, a new paper states.

If designed well, such policies would not only contribute to decarbonising Europe, but would also reduce inequality, researchers at thinktank Positive Money say.

Central bankers have warned that climate change poses a risk to financial stability. But little attention has been given to the economic impact of the transition to a green economy.

While efforts to decarbonise are needed for the energy transition, such policies can at times unevenly burden workers and regions that are dependent on carbon-intensive industries.

For example, inflation is often a key driver of inequality, as low-income households often spend a higher portion of their income on key services like energy and food. During an energy shock, such as the Iran war or the invasion of Ukraine, it is often those in low-income households that are hardest hit financially, authors Bruno De Conti and Joe Herbert write. Such inequality can be further exacerbated by monetary policy, they add.

The authors argue that the green transition and inequality can no longer be treated separately, and that we need to look beyond their financial risks and impacts.

“Monetary policy inevitably affects income distribution, employment and investment patterns. Ignoring these effects does not make policy neutral; it simply allows existing inequalities to deepen.”

To ensure a just transition, the ECB should not only consider inequality in its green monetary policy, but should also closely coordinate with other policymakers as it “cannot achieve this objective alone but should become an active partner within the broader European policy framework,” the paper states.

Supporting a just transition does not need to come at the cost of financial stability. Climate change is already driving price instability, “so supporting [a] just transition is crucial to fulfilling central banks’ primary mandates.”

The authors make several policy recommendations to the ECB, including implementing a dual interest rate system; expanding beyond just the single mandate framework to one that considers both climate and jobs; improving data collection; calculating inflation for each Eurozone country rather than for the whole area, to account for regional and income differences; engaging with the Just Transition Platform; and promoting more diversity within the ECB staff and board.

“A just transition is not simply a social objective, it is also a prerequisite for maintaining political support for Europe’s climate agenda,” the authors write.

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