In 2015, Europe faced dual challenges: combating climate change and reviving economic growth. The European Central Bank (ECB) responded to the imminent risk of deflation with a significant quantitative easing program, purchasing large volumes of securities on the secondary market. This intervention aimed to halt a deflationary spiral, though it raised questions regarding its implementation details and potential economic impacts.
The year also marked a crucial juncture for addressing climate change. European policies were tasked with operationalizing carbon-neutral objectives set by the Union, which current market mechanisms like the European Union Emissions Trading System (EU-ETS) alone could not achieve. Internationally, Europe's leadership in climate policy would be decisive for the success of the December 2015 Paris conference, where an historic climate agreement was expected.
This analytical note suggests a novel approach at the intersection of economic growth and climate policy. It proposes making climate-related private securities eligible for ECB asset purchases. This mechanism would assign a 'Carbon Social Value' (CSV) to carbon assets, valuing their external carbon impact when a suitable carbon price is unavailable. This would immediately influence private investment decisions, potentially boosting growth, and incentivize governments to implement carbon pricing mechanisms to ensure public finance neutrality.
The note highlights the challenge of establishing a carbon price due to the difficulty in aligning traditional climate policy tools with effective financing mechanisms that encourage low-carbon investments and penalize carbon-intensive capital. Historically, carbon pricing mechanisms have struggled due to issues around fair distribution, inertial effects from existing capital stock, and resistance from stakeholders unwilling to bear the costs of transitioning to a low-carbon economy.
The proposed tool combines monetary policy with incentives for low-carbon investment, aiming to accelerate the shift towards a sustainable growth model. By integrating climate considerations into asset valuation, this approach seeks to leverage the ECB's quantitative easing to fund immediate investment projects, thereby facilitating the desired transition towards a low-carbon economy. The note outlines the technical details of this monetary tool and discusses its potential application in 2015 at the European scale.
