ECB: Green debt purchases have little effect on pollution

purchases of green debt have little effect on eurozone and global pollution, according to a report from the European Central Bank (ECB)but they can accelerate investments in technologies for ecological transformation.

In a study published Monday, ECB economists Alessandro Ferrari and Valerio Nispi Landi examine whether central bank purchases of green debt contribute to reducing CO2 emissions, when governments gradually introduce carbon taxes, and try to to understand how these measures can be adapted to enhance their effectiveness.

ECB simulations show that “green QE can curb emissions by shifting demand from the brown to the green sector”According to the report titled “Towards the green economy: the importance of central bank asset purchases”.

However, the report adds, “the effect on the stock of eurozone and global pollution (the net cumulative sum of emissions) is small.”

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The authors add that these results are obtained “in a model with generous assumptions in favor of the effectiveness of green QE.”

A central bank’s purchases of green debt can increase interest on brown assets, the bonds of companies that emit the most CO2, and thus reduce emissions, but they do not provide a quantitative assessment of this effect.

This monetary policy is desirable if there is no carbon tax.

Other economists quoted in the report also believe that temporary green QE has a “limited effect on pollution”.

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“Green QE has limited environmental benefits, making it a weak tool for tackling climate change”says the ECB.

The gradual introduction of permanent carbon taxes reduces output, because brown companies have more costs, and lowers prices, because households reduce demand by expecting lower incomes in the future.

In addition, green debt purchases stimulate production and prices, partially offsetting the economic impact of the tax, which is deflationary.

However, the transition to a green economy could cause major transformations in production technologies, and green debt purchases may accelerate these transformations, according to ECB economists.

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The European Union (EU) wants to be climate neutral by 2050 and is committed to keeping the increase in global average temperature well below 2ºC above pre-industrialisation levels.

“Although democratically elected governments bear the primary responsibility for achieving this goal, central banks can also play a role”adds the report.

For this reason, central banks such as the ECB, the Bank of England and the Sverige Riksbank of Sweden have begun to study how to decarbonize their balance sheets and their debt portfolios.

Source: EFE

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