Working Paper: CEPR ID: DP13576
Authors: Dirk Schoenmaker
Abstract: Central banks look at climate related risks at the financial stability side. Should they also take carbon intensity of assets into account at the monetary policy side? After reviewing the central bank mandate, the paper proposes a tilting approach to steer the Eurosystem’s asset and collateral framework towards low carbon assets. We find that a modest tilting approach could reduce carbon emissions in the Eurosystem’s corporate and bank bond portfolio by over 40 per cent. It could also lower the cost of capital of low carbon companies in comparison with high carbon companies by 4 basis points. Our findings suggest that such a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Price stability, the primary objective, is, and should remain, the priority of the Eurosystem.
Keywords: monetary policy; assets; collateral; carbon emissions; cost of capital
JEL Codes: E52; E58; Q01; Q52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tilting of the Eurosystem's asset and collateral framework towards low carbon assets (E52) | Reduction in carbon emissions in the corporate and bank bond portfolio (G39) |
| Tilting of the Eurosystem's asset and collateral framework towards low carbon assets (E52) | Lower cost of capital for low carbon companies (G32) |