Work stream on climate change
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Occasional Paper Series
Climate change and monetary policy in the euro area
No 271 / September 2021
Disclaimer: This paper constitutes staff input into the Governing Council's deliberation in the context of the ECB's monetary policy strategy review. This paper should not be reported as representing the views of the Eurosystem. The views expressed are those of the authors and do not necessarily reflect those of the Eurosystem.
Acknowledgements
This report has been jointly produced by the Eurosystem work stream on climate change and monetary policy comprising staff from the European Central Bank (ECB) and the national central banks (NCBs) of those countries that have adopted the euro. The report fed into the Governing Council's deliberations on the monetary policy strategy review 2020-21 but does not reflect the outcome of these deliberations.
The authors would like to thank Christophe Beuve, Dirk Broeders, Alessandro Calza, Siobhán Devin, Philipp Hartmann, Elke Heinle, Vesela Ivanova, Luc Laeven, Bettina Landau, Fernando Monar, Giulio Nicoletti, Gilles Noblet, Romana Peronaci, Marcin Przybyla, Imène Rahmouni-Rousseau, René Rollingswier, Massimo Rostagno, Philipp Rother, Torsti ("Toto") Silvonen, Frank Smets, João Sousa, Bram Van der Eem, Isabel Vansteenkiste, Gyorgy Varhelyi, Ralph Weidenfeller, Paul Wessels, Caroline Willeke, Chiara Zilioli, and participants in various presentations at the ECB's Monetary Policy Committee for their valuable comments, discussions, input and suggestions.
The authors are also grateful to Ursel Baumann, Annekatrin Bergmann, and Manfred Kremer for their support throughout the production and editorial process.
Hélène Gaston and Mariadolores Schiavone provided excellent research assistance. João Domingues Semeano provided data support for Chapter 2.
Co-leads of the work stream | |
Francesco Drudi | Emanuel Moench |
European Central Bank | Deutsche Bundesbank |
email: francesco.drudi@ecb.europa.eu | email: emanuel.moench@bundesbank.de |
Cornelia Holthausen* | Pierre-François Weber |
European Central Bank | Banque de France |
email: cornelia.holthausen@ecb.europa.eu | email: pierre-francois.weber@banque-france.fr |
(* from November 2020; until October 2020: Isabel Vansteenkiste) | |
Coordinators | |
Gianluigi Ferrucci | Ralph Setzer |
European Central Bank | European Central Bank |
email: gianluigi.ferrucci@ecb.europa.eu | email: ralph.setzer@ecb.europa.eu |
Additional contributing authors | |
Bernardino Adao | Stéphane Dees (lead author of Section 2.4) |
Banco de Portugal | Banque de France |
Spyros Alogoskoufis | Mar Delgado Téllez |
European Central Bank | Banco de España |
Malin Andersson (co-lead author of Chapter 1) | Virginia Di Nino |
European Central Bank | European Central Bank |
Jana Aubrechtova (co-lead author of Sections 7.2 and 7.3) | Arturo Diez-Caballero |
European Central Bank | European Central Bank |
Aris Avgousti | Claudia Duarte (co-lead author of Sections 7.2 and 7.3) |
Central Bank of Cyprus | European Central Bank |
Francesca Barbiero | Ángel Estrada |
European Central Bank | Banco de España |
Lena Boneva | Donata Faccia |
European Central Bank | European Central Bank |
Andreas Breitenfellner | Ivan Faiella |
Oesterreichische Nationalbank | Banca d'Italia |
Giovanna Bua | Mátyás Farkas |
European Central Bank | European Central Bank |
Maurice Bun | Alessandro Ferrari |
De Nederlandsche Bank | Banca d'Italia |
Francesco Caprioli | Fabio Fornari |
Banca d'Italia | European Central Bank |
Matteo Ciccarelli (lead author of Chapter 3) | Alberto Fuertes Mendoza |
European Central Bank | Banco de España |
Matthieu Darracq Pariès | Pablo Garcia-Sanchez (co-lead author of Chapter 1) |
European Central Bank | Banque centrale du Luxembourg |
Alessandro Giovannini
European Central Bank
Patrick Grüning
Lietuvos bankas
Paolo Guarda
Banque centrale du Luxembourg
Gerbert Hebbink
De Nederlandsche Bank
Sarah Jane Hlásková Murphy (co-leadauthor of Chapter 6) European Central Bank
Michael Ioannidis (co-lead author of Chapter 6) European Central Bank
Lorenzo Isgro
European Central Bank
Daniel Kapp
European Central Bank
Mélissa Kasongo Kashama
Nationale Bank van België/Banque Nationale de Belgique
Paloma Lopez-Garcia
European Central Bank
Matija Lozej European Central Bank
Reamonn Lydon
Central Bank of Ireland
Otso Manninen
Suomen Pankki - Finlands Bank
Andres Manzanares
European Central Bank
Niall McInerney
Central Bank of Ireland
Christoph Meinerding
Deutsche Bundesbank
Katri Mikkonen
European Central Bank
Alessandro Mistretta
Banca d'Italia
Francesco Paolo Mongelli
European Central Bank
Carlos Montes-Galdon
European Central Bank
Georg Müller
European Central Bank
Carolin Nerlich (lead author of Sections 2.1 and 2.2) European Central Bank
Malgorzata Osiewicz
European Central Bank
Boris Osorno-Torres
European Central Bank
Jean-François Ouvrard
Banque de France
Adrian Page
European Central Bank
Niki Papadopoulou
Central Bank of Cyprus
Miles Parker (lead author of Chapter 4 and Section 5.5) European Central Bank
Filippos Petroulakis
Bank of Greece
Anamaria Piloiu
European Central Bank
Gašper Ploj
Bank of Slovenia
Wolfgang Pointner
Oesterreichische Nationalbank
Alexander Popov
European Central Bank
Doris Prammer
Oesterreichische Nationalbank
Ricardo Queiroz
European Central Bank
Omar Rachedi
Banco de España
Lavinia Rognone
European Central Bank
Oke Röhe
Deutsche Bundesbank
Madelaine Roos
European Central Bank
Simone Russo
Bank Ċentrali ta' Malta/Central Bank of Malta
Daniel Santabárbara
Banco de España
Guido Schotten
De Nederlandsche Bank
Beatriz Sotomayor
European Central Bank
Livio Stracca
European Central Bank
Fabio Tamburrini
European Central Bank
Anastasia Theofilakou
Bank of Greece
Pinelopi Tsalaporta
Bank of Greece
Jan Willem van den End
De Nederlandsche Bank
Lia Vaz Cruz
European Central Bank
Mark Andreas Weth
Deutsche Bundesbank
Gonzalo Yebes Gomez
European Central Bank
This report is part of a set of papers within the ECB's Occasional Paper Series, related to the ECB's Strategy review 2020-21. This set includes the following papers:
Set of Occasional Papers related to the ECB's Strategy review 2020-21
No 263, "The implications of globalisation for the ECB monetary policy strategy". No 264, "Inflation expectations and their role in Eurosystem forecasting".
No 265, "Inflation measurement and its assessment in the ECB's monetary policy strategy review". No 266, "Digitalisation: channels, impacts and implications for monetary policy in the euro area".
No 267, "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement". No 268, "Key factors behind productivity trends in EU countries".
No 269, "The ECB's price stability framework: past experience, and current and future challenges".
No 270, "Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities". No 271, "Climate change and monetary policy in the euro area".
No 272, "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area".
No 273, "Monetary-fiscal policy interactions in the euro area".
No 274, "Clear, consistent and engaging: ECB monetary policy communication in a changing world". No 275, "Employment and the conduct of monetary policy in the euro area".
No 276, "The mandate of the ECB: Legal considerations in the ECB's monetary policy strategy review". No 277, "Evolution of the ECB's analytical framework".
No 278, "Assessing the efficacy, efficiency and potential side effects of the ECB's monetary policy instruments since 2014".
No 279, "The need for an inflation buffer in the ECB's price stability objective - the role of nominal rigidities and inflation differentials". No 280, "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers".
Contents
Abstract | 4 | ||
Executive summary | 5 | ||
1 | Economic implications of the physical risks of climate change | 20 | |
1.1 | Global warming | 20 | |
1.2 | Extreme weather events | 26 | |
Box 1 International evidence of the impact of climate change on | |||
price stability | 29 | ||
2 | Climate policies and transition risks | 32 | |
2.1 | EU climate frameworks and EU policy initiatives | 33 | |
2.2 | The national policy mix to achieve climate targets | 37 | |
2.3 | Towards an enhanced policy mix | 46 | |
2.4 | The macroeconomic impact of mitigation policies | 48 | |
Box 2 Implications of the COVID-19 pandemic for EU climate policy | 56 | ||
Box 3 Economic and environmental impact of introducing a carbon | |||
tax in Spain | 57 | ||
Box 4 The impact of a carbon tax on production costs across EU | |||
countries | 59 | ||
3 | Challenges for macroeconomic modelling | 62 | |
3.1 | Climate models and their use in economic frameworks | 62 | |
3.2 | Integrating climate risks into central bank workhorse models | 67 | |
3.3 | Implications for Eurosystem projections | 72 | |
Box 5 Environmental dynamic stochastic general equilibrium | |||
models: specifications and selected applications | 76 | ||
Box 6 Predictions of a macro-financial model for the transition | |||
period from a low-carbon tax to the optimal carbon tax level | 78 | ||
4 | The impact of climate change on the financial system | 81 | |
4.1 | The potential impact of transition risk on financial institutions | 82 | |
4.2 | Pricing of physical and transition risks | 83 |
ECB Occasional Paper Series No 271 / September 2021 | 1 |
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ECB - European Central Bank published this content on 21 September 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 21 September 2021 08:21:07 UTC.