## Climate Change and Monetary Policy ## Source details **Canonical URL:** [Climate Change and Monetary Policy](https://www.imf.org/en/publications/fandd/issues/2021/09/isabel-schnabel-ecb-climate-change) ## Other formats - [Markdown version](/en/publications/fandd/issues/2021/09/isabel-schnabel-ecb-climate-change/index.md) - [Structured JSON version](/en/publications/fandd/issues/2021/09/isabel-schnabel-ecb-climate-change/index.json) - [Bundle manifest](/en/publications/fandd/issues/2021/09/isabel-schnabel-ecb-climate-change/bundle-manifest.json) ## Bibliographic details - Authors: ISABEL SCHNABEL - Published: September 2, 2021 --- ### Overview - Author: ISABEL SCHNABEL, member of the executive board of the European Central Bank. - Publication: F&D Magazine, September 2021. - Core argument: Central banks must "do their part in fighting global warming" because climate change materially affects central banks’ ability to achieve their mandates, including price stability, financial stability, and banking supervision. ### Observed climate change benchmarks - The past six years have been the hottest six on record. - Temperatures in 2020 exceeded the 1850–1900 average by 1.25°C (2.25°F). ### ECB economy-wide climate stress test (scope and approach) - The ECB is conducting an economy-wide stress test to quantify consequences of climate change on companies and banks. - The exercise draws on a range of climate scenarios developed by the Network for Greening the Financial System (NGFS). - The scenarios are used to assess the potential impact on roughly 4 million companies worldwide and nearly 2,000 banks in the euro area. - NGFS membership evolution: established with eight members in 2017; now has 95 members and 15 observers. The IMF joined as an observer in 2019. ### Preliminary stress-test findings and model results - Without further mitigation policies, physical risks (heat waves, windstorms, floods, droughts, and the like) will probably increase substantially (Alogoskoufis and others 2021). - The average default probability of the credit portfolios of the 10 percent of euro area banks most vulnerable to climate risks could rise substantially—up 30 percent by 2050. - Firms across Europe are exposed to physical risks from climate change, although risks are distributed unevenly. - Compared with physical risks, the costs of transitioning to a carbon-neutral economy appear relatively contained (de Guindos 2021). - Recent IMF research (IMF 2020) echoes the finding that up-front investment in mitigation will likely be more than offset over the long run as firms avoid aggravated physical risk and reap economic rewards of mitigation. ### Channels through which climate change affects central bank mandates - Transmission channel: - Losses from materializing physical risks or stranded assets could weigh on financial institutions’ balance sheets. - Reduced balance-sheet health may reduce the flow of credit to the real economy and weaken transmission of monetary policy to consumption and investment. - Central banks are exposed to potential losses from securities acquired in asset purchase programs and on collateral provided by counterparties. - Equilibrium real interest rate channel: - Climate impacts (e.g., impaired labor productivity, increased morbidity and mortality) and reallocation of productive resources to adaptation could lower the equilibrium real rate of interest. - Increased precautionary savings and reduced incentives to invest could further lower the equilibrium rate, increasing the likelihood that policy rates will be constrained. - Countervailing possibility: green innovation and investment might raise equilibrium rates and help exit the low-inflation, low-interest-rate environment. - Inflation dynamics channel: - Greater incidence of physical risks can cause short-term fluctuations in output and inflation that amplify longer-term macroeconomic volatility. - Mitigation policies (for example, carbon pricing programs) can affect price stability by precipitating large and long-lasting trends in relative prices and driving a wedge between headline and core measures of inflation. ### Policy implications and central bank responses - Timing: There are clear benefits to acting early—short-run transition costs can be offset over the long run by avoided physical risk and mitigation benefits. - Role of central banks: - Central banks cannot remain on the sidelines; a consensus is building that they should increase attention to climate change given its implications for mandates. - Central banks are starting to integrate climate-related risks into their monetary policy operations. - Strategic message: Now is the time to undertake ambitious and broad-based action to ensure an orderly transition and mitigate the effects of climate change. ### Key citations and referenced works (as cited in the source) - Alogoskoufis, S., and others. 2021. “Climate-Related Risks to Financial Stability.” Financial Stability Review, European Central Bank, Frankfurt. - de Guindos, L. 2021. “Shining a Light on Climate Risks: The ECB’s Economy-wide Climate Stress Test.” ECB Blog, March 18. - International Monetary Fund (IMF). 2020. “Mitigating Climate Change—Growth- and Distribution-Friendly Strategies.” World Economic Outlook, Chapter 3, Washington, DC, October. - Papoutsi, M., M. Piazzesi, and M. Schneider. 2021. “How Unconventional Is Green Monetary Policy?” Stanford University working paper, Stanford, CA. - Schnabel, I. 2021. “From Market Neutrality to Market Efficiency.” Welcome address at the ECB DG-Research Symposium “Climate Change, Financial Markets and Green Growth.” Frankfurt, June 14. *Source: Climate Change and Monetary Policy, ISABEL SCHNABEL, F&D Magazine, September 2021.* --- ## Content in this bundle - **تغير المناخ والسياسة النقدية** - [تغير المناخ والسياسة النقدية (Markdown version)](/-/media/files/publications/fandd/article/2021/september/ar/schnabel.pdf.md){rel="alternate" type="text/markdown"} - [تغير المناخ والسياسة النقدية (PDF)](/-/media/files/publications/fandd/article/2021/september/ar/schnabel.pdf){rel="external" type="application/pdf"} - **El cambio climático y la política monetaria● Finanzas y Desarrollo ● Septiembre de 2021** - [El cambio climático y la política monetaria● Finanzas y Desarrollo ● Septiembre de 2021 (Markdown version)](/-/media/files/publications/fandd/article/2021/september/es/isabel-schnabel-ecb-climate-change-es.pdf.md){rel="alternate" type="text/markdown"} - [El cambio climático y la política monetaria● Finanzas y Desarrollo ● Septiembre de 2021 (PDF)](/-/media/files/publications/fandd/article/2021/september/es/isabel-schnabel-ecb-climate-change-es.pdf){rel="external" type="application/pdf"} - **Les changements climatiques et la politique monétaire** - [Les changements climatiques et la politique monétaire (Markdown version)](/-/media/files/publications/fandd/article/2021/september/fr/isabel-schnabel-ecb-climate-change-fr.pdf.md){rel="alternate" type="text/markdown"} - [Les changements climatiques et la politique monétaire (PDF)](/-/media/files/publications/fandd/article/2021/september/fr/isabel-schnabel-ecb-climate-change-fr.pdf){rel="external" type="application/pdf"} - **Climate Change and Monetary Policy - IMF F&D** - [Climate Change and Monetary Policy - IMF F&D (Markdown version)](/-/media/files/publications/fandd/article/2021/september/isabel-schnabel-ecb-climate-change.pdf.md){rel="alternate" type="text/markdown"} - [Climate Change and Monetary Policy - IMF F&D (PDF)](/-/media/files/publications/fandd/article/2021/september/isabel-schnabel-ecb-climate-change.pdf){rel="external" type="application/pdf"} - **Изменение климата и денежно-кредитная политика** - [Изменение климата и денежно-кредитная политика (Markdown version)](/-/media/files/publications/fandd/article/2021/september/ru/schnabel-ru.pdf.md){rel="alternate" type="text/markdown"} - [Изменение климата и денежно-кредитная политика (PDF)](/-/media/files/publications/fandd/article/2021/september/ru/schnabel-ru.pdf){rel="external" type="application/pdf"} - **气候变化与货币政策 - 金融与发展 - 国际货币基金组织季刊 2021年9月号·第58卷·第3期** - [气候变化与货币政策 - 金融与发展 - 国际货币基金组织季刊 2021年9月号·第58卷·第3期 (Markdown version)](/-/media/files/publications/fandd/article/2021/september/zh/schnabel.pdf.md){rel="alternate" type="text/markdown"} - [气候变化与货币政策 - 金融与发展 - 国际货币基金组织季刊 2021年9月号·第58卷·第3期 (PDF)](/-/media/files/publications/fandd/article/2021/september/zh/schnabel.pdf){rel="external" type="application/pdf"} - **CHAPTER 3 MITIGATING CLIMATE CHANGE—GROWTH- AND DISTRIBUTION-FRIENDLY STRATEGIES** - [CHAPTER 3 MITIGATING CLIMATE CHANGE—GROWTH- AND DISTRIBUTION-FRIENDLY STRATEGIES (Markdown version)](/-/media/files/publications/weo/2020/october/english/ch3.pdf.md){rel="alternate" type="text/markdown"} - [CHAPTER 3 MITIGATING CLIMATE CHANGE—GROWTH- AND DISTRIBUTION-FRIENDLY STRATEGIES (PDF)](/-/media/files/publications/weo/2020/october/english/ch3.pdf){rel="external" type="application/pdf"} --- _Source: https://www.imf.org/en/publications/fandd/issues/2021/09/isabel-schnabel-ecb-climate-change_