The climate impact of quantitative easing
Note that an 8-page policy brief for decision-makers that draws on the full 36-page paper is available.
Both climate change and the low-carbon transition are likely to have deep implications for the functioning and stability of the macro financial system. The discussion of possible risks has largely focused on the private sector; however, this paper argues that central banks should also consider how their operation of monetary policy could affect the transition to a low-carbon economy. Even supposedly market-neutral interventions by central banks may show an unintended structural bias towards carbon-intensive industry incumbents.
- Sectoral analysis of the quantitative easing (QE) corporate bond purchase programmes of the European Central Bank (ECB) and the Bank of England suggests a skew towards high-carbon sectors. For example, it is estimated that utilities, the most carbon-intensive sector by emissions, make up the largest share of purchases for both banks.
- This carbon-intensive skew raises concerns of disproportionately increasing prices and encouraging additional debt issuance in high-carbon relative to low-carbon sectors. The purchase of such assets is in direct contradiction with, and may undermine, the signals that financial regulators are making about the risks associated with high-carbon investments.
- The European Central Bank and Bank of England should increase transparency around the purchases and selection process.
- Central banks should investigate the impact of their interventions on both high-carbon and low-carbon investment.
- The European Central Bank and Bank of England could consider options for changing their purchasing strategies, by revising eligibility criteria and using monetary policy more effectively to support long-term sustainable growth.
- Central banks should communicate and coordinate with fiscal policy-makers and financial regulators.