Central Bank Pondering Incorporation of Environmental and Natural Elements in Monetary Decisions

The European Central Bank (ECB) has announced a commitment to considering the implications of climate change and nature degradation in its monetary policy. However, there are mixed opinions about the ECB's potential move towards green interest rates.

According to Yannis Dafermos, a professor at the Soas University of London, the ECB's focus remains on the single materiality of risk, rather than the potential impact of banks' operations on climate change and nature degradation. Dafermos is not optimistic about the ECB considering green interest rates, as it has not publicly committed to such a move.

Jens van' t Klooster, a political economy professor at the University of Amsterdam, suggests that the ECB may consider green dual interest rates in the near future. Green dual interest rates allow central banks to offer lower rates to encourage banks to lend to specific sectors, such as green energy projects. However, Higher interest rates make it more difficult to fund clean energy investments, according to van' t Klooster. He also notes that high interest rates make it more difficult for governments to spend on climate and environmental objectives.

Some NGOs and economists have encouraged the ECB to introduce a lower rate for green energy projects. In response, the ECB has stated that it plans to adapt its tools and market operations in relation to disclosures, risk assessment, corporate sector asset purchases, and its collateral framework. The ECB's mandate now includes assessing both climate change and climate degradation due to their potential impact on financial stability.

Dafermos proposes that the ECB could decarbonize its corporate bond portfolio further, reduce interest rates for green projects while increasing rates for banks investing in fossil fuels, and support green sovereign bonds. He also views the inclusion of nature degradation in the ECB's strategy as a means for further research rather than immediate action.

The ECB has not yet looked into green interest rates, but is committed to incorporating climate change into its operational framework and has not ruled out any instruments. Instead, the ECB is primarily focused on risk exposure, according to Dafermos, who also emphasizes the need for the financial sector to contribute to a net zero economy.

This article was last updated on July 8, 2025. The ECB has not provided any information or statements about the possible introduction of dual interest rates for green energy projects based on the available search results.

Central Bank Pondering Incorporation of Environmental and Natural Elements in Monetary Decisions