Greening monetary policy

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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