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Climate change and the strategy review

Addressing climate change is a global challenge and a priority for the European Union. While governments should take the lead, the ECB also has a strong interest in helping tackle climate change. Our job is to keep prices stable. Climate change affects how the prices of things change through its impact on the economy. We have committed to an ambitious action plan to take climate change risks into account in our monetary policy.

Why was climate change part of our strategy review?

Addressing climate change requires urgent action

Climate change is one of the greatest challenges that we face today. It affects all of us and requires urgent action. Rising temperatures and extreme weather already severely disrupt our lives and economies. The problems created by climate change will only get worse if we do not tackle them now, together.

Governments should take the lead

We all have a role to play in tackling climate change, but governments should take the lead because they are primarily responsible for climate policy and have the most effective tools.

We also need to help where we can

We at the ECB also have a strong interest in helping address climate change. This is because climate risks affect how we do our job of keeping prices stable.

How does climate change affect the job we do?

Climate change makes monetary policy more difficult

Extreme weather events make our economy less predictable. They affect how much is produced and how much things cost. For example, a very long drought may ruin several harvests. When less food is available, food prices rise. As these events become more frequent, they create more uncertainty. This makes it harder for us to judge which shocks to our economy require changes to our monetary policy, and which do not.

Climate change is a long-term challenge

While we normally focus on how prices will develop over the next few years, we also need to consider that climate change is a much longer-term challenge. Policies designed to encourage greener activities in our economy also affect how much things cost. For instance, taxes on coal, oil and gas may make energy generated from these resources more expensive. Governments may also choose to support more sustainable technologies and greener types of energy, which may disrupt some industries and regions more than others and will ultimately affect the way our economy works.

Climate change also affects our financial system

Risks arising from climate change can affect the stability of our financial and banking systems. For example, assets seen as valuable today could be worth much less tomorrow. Take an energy company that drills for oil to supply its customers. In a greener economy where drilling is banned, the energy company would be worth a lot less. If the value of its shares falls, other companies and banks holding those shares might also get into trouble. Such events can scare markets and instability can spread. People could lose their jobs. Spending and investment might fall. All this can badly damage the economy and make our job of keeping prices stable much harder.

How can we contribute to tackling climate change?

We are committing to an ambitious, climate-related action plan

We need to take climate change risks into account when making our monetary policy. That will help us make better decisions. But this is a big task. It will not happen overnight. This is why we are committing to a broad and bold action plan to focus our efforts on key areas to help address climate change.

What will we do?

First, we need to better understand how exactly climate change risks affect the economy. To that end we are gathering insights and data. We will make sure that the risks related to climate change are part of our regular analysis of the economy and feed into the models we use to help us understand how the economy works. Second, we will promote knowledge and transparency about climate change risks. As a central bank, we are in a good position to do this because we regularly interact with banks through our monetary policy operations. For instance, we are exploring how our rules could encourage banks to be more open about the climate change risks related to the assets they hold and to tell us about these risks in a consistent way. Third, we will work on our ability to better judge climate risks for our own monetary policy and investment operations. There are other aspects too. You can read more about our action plan in our press release on climate change.

SEE ALSO

Find out more about our climate-related action plan

Climate change in our new strategy

We at the ECB are doing our part to tackle climate change within our mandate. We have decided on an action plan with an ambitious roadmap to incorporate climate change considerations into our monetary policy framework.

Press release
READ MORE
Climate change and monetary policy in the euro area
STRATEGY REVIEW
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