While there is increasing interest in decarbonizing or greening monetary policy, central banks are keen to maintain market neutrality. However, there is evidence that the market has a bias towards carbon-intensive companies. The paper develops a method to tilt the European Central Bank’s (ECB) asset and collateral framework towards low-carbon assets. We find that a medium tilting approach reduces carbon emissions in the ECB’s corporate and bank bond portfolio by over 50%. We show that a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Key policy insights The ECB’s asset and collateral portfolio for monetary policy operations is overweight in high carbon companies. A medium tilting approach towards low-carbon companies reduces carbon emissions by 55% in the ECB's portfolio. It also reduces the cost of capital for low carbon companies. This is an incentive for high carbon companies to reform and adopt low carbon technologies.
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The author is grateful for feedback from three anonymous referees and audiences at the NGFS Conference ?Scaling up Green Finance: The Role of Central Banks? at the Deutsche Bundesbank, the Institut Louis Bachelier Conference ?Green Finance Research Advances? at the Banque de France, the Conference ?Dynamics of Inclusive Prosperity? at Erasmus University, a research seminar at Bruegel and a seminar at the European Central Bank. He would also like to thank Dion Bongaerts, Maria Demertzis, Frank Elderson, Gianfranco Gianfrate, Charles Goodhart, David-Jan Jansen, Clemens Kool, Andre Sapir, Willem Schramade, Marijn van der Sluis, Bert Smid, Ren? Smits, Job Swank, Rens van Tilburg, Casper de Vries, Mark Weth, and Guntram Wolff for useful comments and Tim Kievid for excellent research assistance. The views in this paper are those of the author.
© 2021 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.