This paper investigates the climate impact of central bank refinancing operations, with a focus on the European Central Bank’s Targeted Longer-Term Refinancing Operations (TLTRO) III programme.

The authors find that the emissions content of bank loans granted over the TLTRO III reference period (March 2020 to March 2021) amount to 8% of 2019 emissions in the euro area, and over 80% of total loans issued were directed towards polluting companies. Through the lens of a theoretical model, the authors then investigate the effectiveness of a green credit easing scheme. They find first, that this central bank policy can increase the costs of lending to polluting companies, thus redirecting loans to less-polluting firms, and second, that such a policy could have financial stability implications and therefore should be carefully designed. The paper finishes by outlining three alternative ways to implement a ‘green’ TLTRO programme.

Key points for decision-makers

  • Central banks can have an interest in supporting the transition to a low-carbon economy, given the economic, financial and price stability risks deriving from climate and environmental risks.
  • Several studies find a carbon bias in central bank bond purchase programmes due to the prevalence of manufacturing, utility, automobile and transportation sectors in bond markets. The European Central Bank (ECB) has recently pledged to counteract this bias.
  • The ECB’s TLTRO programme was first introduced in June 2014 to improve the transmission of monetary policy to the real economy. The focus of this paper is on the second tranche of the TLTRO III program (the third series of TLTRO).
  • The authors first provide an assessment of the emissions content and composition of the loans issued by banks participating in the TLTRO III programme.
  • They find that lending activities of institutions participating in the TLTRO III programme in the period from March 2020 to March 2021 generated around 151 million tonnes of CO2, about 8% of overall euro area emissions in 2019.
  • Additional lending under the programme drove loans to more polluting sectors, while lending to less-polluting sectors was almost identical across participating and non-participating banks.
  • The authors then devise a theoretical model where the central bank can counteract the carbon bias in lending activities by differentiating the banks’ costs of funding on the basis of the carbon footprint of their lending portfolios.
  • The authors propose three alternatives for the implementation of a green funding-for-lending scheme by the ECB: (1) an EU policy-based design, based on existing EU environmental criteria for investments such as the EU Taxonomy; (2) a bank-based design, where the bank would decide on how green investments are made; and (3) a supervisory expectations-based design, where central banks or financial supervisors would determine eligibility criteria.
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