Unconventionally Green: Monetary Policy between Engagement and Conflicting Goals

We study the potential role of the ECB in supporting the transition to a low-carbon economy by decarbonizing the corporate sector purchase programme (CSPP). We demonstrate that the carbon intensity of CSPP purchases is determined by three main factors: First, by the CSPP-eligibility criteria, as these tend to exclude bonds from low-emission sectors. Second, by the underlying structure of the bond market, as this tends to be skewed towards carbon-intensive sectors. Third, among the eligible bonds, the ECB tends to select those from relatively emission-intensive sectors. To decarbonize the CSPP, the ECB can theoretically act along these three lines: (i) adjust the CSPP-eligibility criteria to expand the range of eligible low-carbon assets, (ii), revise the principle of market neutrality to tilt the CSPP portfolio towards low-carbon companies, or, (iii), purchase so far neglected low-carbon bonds within the current eligibility and market neutrality framework. As all approaches have either very limited effects or are associated with significant theoretical and practical concerns, we conclude that their contribution to the success of active green monetary policy is not guaranteed, while at the same time risks arise for a monetary policy that targets price stability.