Greening Monetary Policy

Abstract

While there is increasing interest in decarbonising 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.

Keywords: Monetary Policy, Collateral, Decarbonising, Carbon Emissions, Cost of Capital

JEL Classification: E52, E58, Q01, Q52, Q54