Central bankers and politicians are at odds over a new scheme to combat climate change that would get cheap funding to companies pushing the green transition and discriminate against polluters, by offering them two different interest rates.
Politicians, including French President Emmanuel Macron, argue that rolling out such a scheme could be a powerful way to drum up capital for renewables and energy efficiency at a time when high interest rates are choking green investment.
While the European Central Bank agrees in theory that such a scheme could work, its officials refuse to be hurried. Influential board member Isabel Schnabel argued in a recent speech that while environmentally targeted lending, or ‘green TLTROs’, could become part of its toolkit in the future, it would clash with the need to keep money tight in the near term.
Moreover, she and others have pointed out, banks and corporations can’t yet provide sufficiently reliable disclosures and risk assessments to back up any claim to soft loans. Existing data just isn’t good enough to prevent “greenwashing” — and won’t be until lawmakers come up with higher standards for reporting, Eurosystem officials say.
The dispute is becoming spicier because politicians in Brussels and national capitals have run into increasing resistance in the last year from voters who balk at the cost of forcing the transition. The green agenda trumpeted at Davos last year by Commission President Ursula von der Leyen is in disarray, while governments in Germany and France have both been forced into major climbdowns over climate policy.
As so often in Europe, when political momentum stalls, the first reaction is to look to the central bank for help. But the ECB has its own conditions.
“We need to come up with some kind of reasoning that is credible and also holds up in court to justify it from a monetary policy point of view,” harrumphed one Eurosystem official. “We’re an independent central bank, so our justification shouldn’t be: ‘There’s a political call on us to do this, so we do this.’”
Politicians, however, argue the ECB is stalling.
“There is a lack of willingness from the ECB because she gets political pressure from the member states,” that are hawkish on fiscal and monetary policy, said German Green MEP Rasmus Andresen, one of a group that has been pushing ECB President Christine Lagarde on the subject for over a year.
“They are trapped in their ideological fight against inflation, and their analysis is that high-interest rates are good for the economy,” he added. “But the opposite is true. And the public debate in Europe is missing — that’s a problem too.”
One man’s ideological fight is another’s legal obligation, of course. And the ECB has been more concerned with its primary mandate after the sharpest bout of inflation in 40 years, despite its own insistence that it is doing everything it can to aid the green transition.
The ECB, “clearly failed to recognize the urgency of introducing such an interest rate regime,” said German Green MEP Henrike Hahn. “A year later, the sharp decline in investments in renewable energies has made ever more apparent the need for green interest rates.”
But how would it work?
The basic idea is that those who can prove they’re going green will be able to borrow more cheaply than those who can’t. The ECB would enable this by making ‘targeted’ refinancing operations to banks at dual rates. If banks can certify they are lending for green purposes, they would get a cheap rate. If not, they’d have to accept the more punitive ‘brown’ rate.
The concept has been popular for some time among environmentalists, academics and some politicians. MEPs reckon that the ECB already has all the powers it needs to make it reality.
“The ECB can adopt a discounted rate for green investments as of today,” Hahn told POLITICO. According to her, the environmental, social and governance (ESG) requirements enshrined in the Capital Requirements Regulation enacted in 2022 ensures that no new legislation is required.
Given that markets are predicting rate cuts within a few months, she added, the ECB cannot justifiably say that inflation is any obstacle to a dual rate system. Anything less would amount to a failure to live up to its rhetoric.
Pandora’s box
As ever, the debate highlights the tension between what the ECB can actually do on climate change, beyond forcing the banks it supervises to face up to the risks it poses them.
Few of the tools it has tried so far have really moved the dial. Lagarde, in her answers to the MEPs, stressed that lawmakers and elected governments have far more powerful tools at their disposal. These include the EU’s emissions trading scheme and the tax treatment of energy consumption.
A dual rate system could be a decisive break with a hesitant past. But, paradoxically, it could also prove too effective, unleashing a wave of exuberant new spending, adding to overall demand and letting inflation out of the box again. How to square the monetary circle?
Others, including economists at the central bank, are uneasy about abandoning the duty of market neutrality, which goes hand-in-hand with the independence it enjoys under the EU treaty. Offering special terms to a privileged few at the whim of politicians sets a dangerous precedent.
“It politicizes the central bank right away and it violates Rule Number 1: don’t do distributional things if you’re unelected,” one central banking veteran told POLITICO.
“The ECB should have remained intellectually honest, pointing out that no action on their part is needed given that the EU has already a carbon tax/cap and trade,” said Daniel Gros, director of the Center for European Policy Studies. “They made a mistake conceding implicitly the point that green investment deserves a subsidy. They then have to rely on the excuse that their mandate does not allow it.”
