Dafermos, Yannis, Daniela, Gabor, Nikolaidi, Maria ORCID: 0000-0002-8188-5482, van Lerven, Frank and Vargas, Mauricio (2022) The ECB Paris gap: substantive but treatable. Technical Report. Greenpeace, Hongkong; Hamburg.

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Abstract

In July 2022, the European Central Bank (ECB) announced its decisions to design and implement concrete measures to decarbonise its monetary policy framework. These measures target both its corporate bond portfolio, acquired during its unconventional policy interventions, and the collateral rules that govern its normal and unconventional lending to euro area monetary institutions. The ECB primarily aims to better incorporate ‘climate-related financial risk in the Eurosystem balance sheet’ and, secondary, to ‘support the green transition of the economy in line with the EU’s climate neutrality objectives’. In this brief, we evaluate the ECB’s decarbonisation plans. We acknowledge that the July 2022 announcement puts the ECB at the forefront of monetary decarbonisation efforts in high-income countries, if not worldwide. The ECB’s approach has two important ambitions: the ECB appears committed to abandoning the market neutrality logic that has hitherto hardwired a carbon bias into its monetary policy operations, and equally important, the ECB appears to contemplate a strategy that not just incentivises green lending but also penalises dirty lending, both via the tilting of corporate bond holdings (after October 2022) and haircuts and limits on dirty bond collateral. We provide a systematic evaluation of the July 2022 plans by comparing them with what we term a ‘Paris decarbonisation benchmark’ for both the corporate bond portfolio and the collateral rules. We map the plans against this benchmark across the overall guiding principle, scope, metrics, tilting/haircut strategy, exclusion of dirty assets and timeline (see Table 1). The mapping is helpful to both evaluate the gap, if any, between the ECB’s plans and a Paris-aligned decarbonisation approach, and to provide a framework to further explore the granular detail once it is announced (by October 2022). We also provide a short assessment of the ECB announcements about climate-related disclosures and climate risk assessment and management. We identify a significant gap between the decarbonisation plans of the ECB and the Paris Agreement. For the corporate bond holdings, this Paris gap arises from the narrow scope of the ECB’s plans (reinvestments only) and the exclusion strategy. It could be even more substantive depending on the precise details on the guiding principle, metrics and tilting that the ECB will announce in October. The Paris gap is larger for the collateral rules: the ECB’s guiding principle (i.e. the reduction in the Eurosystem risk exposure) is not just at odds with our climate neutrality benchmark, but even on its own terms lacks ambition. This lack of ambition is reflected across all pillars, including the ECB’s refusal to exclude high-carbon assets from its collateral framework.

Item Type:	Monograph (Technical Report)
Uncontrolled Keywords:	climate change; monetary policy; ECB
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Faculty / School / Research Centre / Research Group:	Faculty of Business Faculty of Business > Department of International Business & Economics Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Greenwich Political Economy Research Centre (GPERC)
Last Modified:	01 Nov 2022 16:47
URI:	http://gala.gre.ac.uk/id/eprint/37780

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