There is an objective that matches Ms Lagarde's ambitions: aligning the ECB’s research efforts with those of national banks on the climate-economy link, allocating the necessary human resources and being demanding in terms of results. This would be a good way to enlighten and be heard by public opinion alongside political decision-makers.
Monetary policy in the face of climate shocks
That leaves monetary policy itself. Can it be used to tackle the climate crisis? Benoit Cœuré, in his aforementioned speech, had framed the debate well. Insofar as the climate crisis has economic and financial consequences, the ECB is by definition involved. As climate-related shocks, whether temporary (drought, floods, etc.) or permanent (increase in frequency and/or amplitude), are supply shocks, reducing or increasing the supply of certain goods or production factors via climate migration, they are difficult to tackle through monetary policy. While the central bank can accommodate a temporary shock – for example, a temporary price increase due to an exceptional drought should not trigger a monetary reaction – that is not the case for a permanent shock. Let us assume, for example, that growth is permanently reduced by climate change. In that case, the equilibrium interest rate anchoring monetary policy would itself be reduced, but at the same time prices would deviate from their desired path at a lower level of activity than before. Monetary policy can do little about supply shocks, be they climate related or otherwise, as Jay Powell pointed out in connection with the Trump administration's trade policy.
But what about the choice of assets that are mobilized for monetary policy, mostly sovereign and corporate bonds? Should they not favor climate-responsible corporate debt and punish those that are less so? Christine Lagarde, in calling for a clear nomenclature of assets according to their degree of climate-responsibility by the European Union, made it clear that the ECB would include these elements in its monetary policy operations, be they bank refinancing or balance sheet operations, alongside the traditional criteria of liquidity and risk. The ball is therefore in the political camp. And that is fortunate, because it is not up to the ECB to define these criteria. In its refinancing operations, or in its asset purchase programme, the ECB will incorporate green criteria to determine the choice of private debt instruments. As the ECB's assets are mainly government securities (such as 82% of the assets held in the asset purchase programme), the impact of this new policy will be, beyond the announcement effect, limited. That therefore seems to close the debate.
A "green discount" on public debt?
Does it really though? Christian Gollier often asks: when a motorist emits 32 kg of CO2 by consuming 10 liters of diesel, who is responsible? The company that extracted the oil, the refiner, or the consumer? Perhaps unpleasantly, the answer is that, in the end, it is the consumer. If we accept this analysis, the "greening" of the ECB's assets takes on a completely different dimension. Imposing penalties on the debt securities of an oil company, for example, seems no more justified than exempting the public debt of a country whose residents emit more CO2 than their neighbors. The logic of "greening" the ECB's assets, in refinancing operations for example, should thus lead to the application of a haircut to their country's debt securities, proportional to per capita CO2 emissions. Let us be practical. According to data from the Global Carbon Project, in 2017, Germany's per capita emissions, including those of imported products, at 10.8 tCO2 per capita, were 40% higher than those of Italy (7.7 tCO2), 52% higher than those of France (7.1) and 66% higher than those of Spain (6.5)! Let us imagine for a moment that a "green haircut" policy is applied by the ECB. By increasing the cost of financing the economy, it would create a strong incentive for voters and governments of the most polluting countries to adopt serious policies to reduce their emissions. Let us not dream too much nevertheless, this path would most likely come up against political deadlock.
In conclusion, the hope is for this mental experiment to help visualize that the greening of finance, including at the very source of liquidity, will not go very far in the path of reducing emissions. If we really want to change behavior, production and consumption patterns, we will have to come to carbon pricing, regardless of the source, whether domestic production or imports.
Copyright: Daniel ROLAND / AFP