Note that an 8-page policy brief for decision-makers that draws on the full 36-page paper is available.

Headline issue

Both climate change and the low-carbon transition are likely to have deep implications for the functioning and stability of the macro financial system. The discussion of possible risks has largely focused on the private sector; however, this paper argues that central banks should also consider how their operation of monetary policy could affect the transition to a low-carbon economy. Even supposedly market-neutral interventions by central banks may show an unintended structural bias towards carbon-intensive industry incumbents.

Key messages

Sectoral analysis of the quantitative easing (QE) corporate bond purchase programmes of the European Central Bank (ECB) and the Bank of England suggests a skew towards high-carbon sectors. For example, it is estimated that utilities, the most carbon-intensive sector by emissions, make up the largest share of purchases for both banks.

This carbon-intensive skew raises concerns of disproportionately increasing prices and encouraging additional debt issuance in high-carbon relative to low-carbon sectors. The purchase of such assets is in direct contradiction with, and may undermine, the signals that financial regulators are making about the risks associated with high-carbon investments.

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