Green QE and carbon pricing: looking at potential tools to fight climate change
a carbon tax) is an effective instrument for combatting climate change, the potential contribution of central banks is still debated.
- a carbon tax) is an effective instrument for combatting climate change, the potential contribution of central banks is still debated.
- Central banks around the world have explored various strategies for integrating climate change into their monetary policy frameworks.
- Potential tools include greener collateral frameworks, green lending facilities and green quantitative easing (QE), whereby central banks “tilt” their balance sheets towards bonds issued by firms in “clean” or non-polluting sectors.
- How effective are these tools in reducing carbon emissions relative to a carbon tax?
- In Abiry, Ferdinandusse, Ludwig and Nerlich (2022), we contribute to this debate by assessing the effectiveness of green QE in limiting global warming compared with a carbon tax.
- We define green QE as a full portfolio reallocation of the outstanding stock of privately issued bonds held by central banks towards a portfolio exclusively comprising green bonds.
- Intermediate goods are produced using the inputs of capital, labour and energy (which can be either clean or dirty).
- With a less extreme scenario in which only part of the central banks’ portfolio is tilted, the climate impact of green QE is even more limited.
- The two counteracting forces of green QE outlined above explain why the overall effectiveness of green QE, even with a full portfolio shift, is more limited as compared with other policy tools, such as a carbon tax.
- What level of carbon tax would be needed to achieve the same reduction in temperature as green QE?
- While a carbon tax is the most effective means for combatting climate change, the analysis shows there can also be a limited role for central banks.