Why and How the ECB Should Go Beyond Market Neutrality

February 1, 2021Published by Positive Money Europe

This policy brief from Positive Money Europe shows how the principle of market neutrality clashes with the European Central Bank’s (ECB) commitments on climate change, while also representing a financial risk for its balance sheet. It recommends that the ECB instead use the upcoming EU taxonomy on sustainable investments as an emissions-reducing benchmark for their asset purchases, collateral framework and other monetary policy operations.

The paper begins with an overview of the debate on whether and how the ECB should play a role in supporting the EU’s climate and environmental objectives, a debate centred around the concept of ‘market neutrality’. The need to move beyond strict market neutrality is increasingly understood within the ECB, which has formally recognised the problem by including the issue in its 2021 research agenda.

However the authors argue that the concept of market neutrality is contradictory, and clashes with the need to reduce carbon emissions  as well as creating a financial risk for the ECB’s balance sheet. “By abiding by the market neutrality principle, the ECB is automatically contributing to climate change,” the authors say, pointing to substantial research showing a heavy carbon bias in ECB lending and purchases.

The paper then examines how the ECB can move beyond market neutrality, pointing out that it is not a legal requirement under the bank’s mandate. The EU taxonomy could be incorporated into the ECB policies, it suggests, helping the bank to identify financial activities that contribute to the EU’s environmental objectives.

It concludes with five specific actions that the European Parliament could take to contribute to the ECB’s debate on market neutrality and encourage the bank to align its operations with EU emissions targets and the Paris agreement.

This page was last updated April 22, 2021

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