"The Executive Board of the European Central Bank wants to make monetary policy "greener". Hardly a week goes by in which the topic is not promoted by a member of the Executive Board. In addition to the visible effort to make the traditionally dry-seeming monetary policy appear practically helpful and close to the people, the ECB's activities in the matter itself amount to a further significant expansion of its competencies. This involves, first, independently assessing the environmental friendliness of projects financed by corporate bonds and, second, giving preference to issuers rated positively in securities purchases.
It is not easy for anyone who wants to criticize this policy to do so, as it is easy to assume a lack of interest in climate issues or a negative attitude toward European institutions. Neither applies to us: We are concerned about the legitimacy of the independence of a central bank that is stretching its mandate into the political realm.
The legitimacy of "green" monetary policy is based on three building blocks: a presumed contribution of green monetary policy to price stability, a generous interpretation of the ECB's mandate, and a postulated market failure. We want to appreciate these building blocks in detail.
Along the first line of reasoning, it is argued that climate-related environmental disasters could cause certain prices - such as food prices - and thus inflation to rise. The ECB is thus called upon to prevent climate change. Such very long-term interrelationships are certainly conceivable, but they have been too little studied to derive quantifiable recommendations for short-term, monetary policy measures. On the one hand, the direction and magnitude of the impact of climate change on individual prices are difficult to predict. On the other hand, it is unclear to what extent climate change can be controlled by European monetary policy, since it is a global phenomenon. Above all, however, there is no credible link between individual prices and the ECB's primary objective. [...]
More serious is the argument that climate-related disasters could complicate monetary policy management if they affect the financial sector. Therefore, the central bank would have to counteract climate change. If this argument were viable, however, the central bank would have to assess and counter risks in many other policy areas as well. The ECB would have to get involved in foreign or trade policy to prevent wars or trade conflicts and resulting financial crises. At least so far, however, no one is calling for this. [...]
Second, and in the alternative, the argument is therefore used that monetary policy should also support the EU's general economic policy in accordance with the treaty, provided that this does not run counter to the goal of monetary stability. But can the ECB pursue climate policy via the bond market without compromising on the objective of monetary stability? The answer is not straightforward. If "green" and other bonds are considered close substitutes in the market, it does not matter which bonds the central bank buys for the transmission of monetary policy to the real economy. The prices of both bonds then go hand in hand anyway. But then green monetary policy would be effectively ineffective. If, on the other hand, the bond substitution relationship is not perfect, a central bank transaction will have different effects across economic sectors.
However, the chain of effects is uncertain and makes inflation more difficult to manage. Focusing purchases now on green bonds in accordance with a climate target, rather than broadly across all eligible segments of the bond market, leaves sector-specific variations in the effectiveness of monetary policy even more at the mercy. But greater variance in inflation would clearly contradict the goal of monetary stability. [...]
The third argument, that the market fails to price climate risks in corporate bonds, is weak, because it is not clear why the ECB, of all institutions, would be able to identify this. Measuring market failures often cited in this context, such as shortened time horizons in pricing, is difficult, otherwise there would be a lot of money to be made. [...]
The ECB has steadily gained influence since its establishment. This applies to its participation in the Troika in the context of the European debt crisis, the extensive assumption of banking supervision or the country-specific purchase of government bonds, which even when interpreted benevolently is at the interface of monetary and fiscal policy. Unlike these past steps, we believe that the ECB is clearly overstepping the mark with a "green" monetary policy. It enters the space left to it by political institutions too readily. Parliaments and governments may seem overwhelmed. But it is not the central bank's job to assess whether they are. The ECB's entry into an environment-based valuation and preferential treatment of bonds is not only damaging in monetary policy terms. Even if it were not formally illegal, it would turn monetary policy into a democratically non-legitimized environmental policy actor that the European treaties certainly did not intend to use.
Monetary policy modesty and self-restraint set incentives to solve problems where they arise. They should be the virtues of every central banker. A monetary policy seeking popularity that does not take seriously the limits of its mandate undermines its independence in the long run."