ECB must not ignore inflation driven by green transition

Europe’s transition to a greener, lower-carbon economy carries a cost that monetary policy cannot ignore, according to Isabel Schnabel, a member of the Executive Board of the European Central Bank.

The continent is facing aprolonged period” of upward inflationary pressure due to natural disasters, a reliance on fossil fuels and high demand for scarce resources needed for green technologies, Schnabel said.

While the ECB will do its part to respond to these interlinked shocks, fiscal policy also has an important role to play, he said.

“Indirect effects of higher energy prices may be a persistent source of upward pressure on core inflation”, Schnabel said Thursday at a conference in Frankfurt.

Last month, inflation in the 19-country eurozone reached a record 5.9%, nearly three times the ECB’s target, and is likely to accelerate further following the Russian invasion of Ukraine and subsequent sanctions.

The war has exposed Europe’s dependence on fossil fuels and is likely to speed up efforts to find alternative, greener energy sources.

Accelerate that transition”it’s the homework of the momentSchnabel said. But “there is a price to pay for going green at a pace that reflects the dual goals of safeguarding our planet and our right to self-determination”.

The drop in energy prices seems “quite unlikely” in light of US and UK embargoes on Russian oil and plans in Europe to cut the country’s gas imports by two-thirds by the end of the year, he said.

Schnabel considers that the “fossillation” remains a major factor contributing to price growth, which the “climate inflation” increases food costs through more frequent droughts and floods, and that the “green inflation” is fueled by the demand for metals and minerals needed in green technologies.

“Monetary policy cannot simply ignore the effects of the green transition if they threaten to jeopardize the achievement of our core mandate of price stability.Schnabel said. But “fiscal policy also has an important role to play in cushioning current supply shocks”.

The European Commission suggests that governments protect vulnerable citizens during the change. How central banks should respond is still being debated, but Schnabel rejected proposals to raise inflation targets or exclude energy from measures that follow price trends.