A new SFL Policy Paper presents a proposal to advance Europe’s green transition: the introduction of a green interest rate by the European Central Bank (ECB). The proposal outlines how targeted monetary policy can play a crucial role in combating climate change, promoting sustainable investment, and supporting the ECB’s mandate of low and stable inflation.
A green interest rate would provide lower interest rates to banks lending to projects that promote renewable energy, energy-efficient real estate renovations, and other sustainable initiatives. In doing so, a green interest rate aims to address two key issues:
- High interest rates slowing the green transition: Current monetary policy disproportionately affects renewable energy projects, which rely heavily on upfront investment. A green interest rate would eliminate this disadvantage and channel financing towards green projects.
- Tackling inflation by reducing dependency on fossil fuels: Europe’s reliance on oil and gas is a major driver of inflation. By encouraging investments in clean energy, the green interest rate could mitigate inflationary pressures caused by volatile fossil fuel prices, helping the ECB fulfill its price stability mandate.
Political Legitimacy through the EU Taxonomy
A significant challenge to implementing a green interest rate has been the definition of “green assets.” This paper proposes using the EU Taxonomy—a robust, politically legitimate EU framework for identifying sustainable activities—to guide the ECB in its green interest rate program.
The paper’s release comes at a critical time, with the ECB entering its new Strategy Review cycle, expected to conclude in 2025. Sustainable Finance Lab aims to put a green interest rate on the agenda once again. This paper is a continuation of our previous work on this topic. While this idea was originally discarded by the ECB, the paper’s authors claim that all the major barriers to the green rate’s introduction are now overcome.
“Europe’s green transition is falling behind, and current monetary policy is making it even harder to catch up. A Green TLTRO could change that by directing capital where it’s most needed—toward building a sustainable future.”
Brenda Kramer, executive director of the Sustainable Finance Lab
Find the full paper below
