Green QE would only help climate a little, ECB paper finds

FRANKFURT (Reuters) – Buying only green bonds in a central bank’s quantitative-easing programme would have just a small and temporary effect on polluting emissions, a study published by the European Central Bank showed on Monday.

The ECB has hinted that it will consider tilting its purchases of corporate bonds towards sustainable debt to correct what it described as the market’s failure to price environmental risks. But the ECB’s own research suggested such “green QE” would only help at the margins.

“The bottom line of our study is that a temporary Green QE is able to affect detrimental emissions in the brown sector, but it has small effects on the stock of pollution,” authors Alessandro Ferrari (NYSE:RACE) and Valerio Nispi Landi wrote.

“The main reason is that climate change and pollution are structural problems, while a temporary Green QE … plays a role along the business-cycle.”

The two researchers first simulated a situation in which the central bank buys green bonds while selling “brown” debt, resulting in higher borrowing costs and lower production for more polluting firms.

They found that this would result in lower emissions but “the effects on the total stock of pollution and thus on TFP (total factor productivity) are negligible”.

The study then simulated a “QE shock” in which the central bank increases its balance sheet either by buying up exclusively green bonds or by buying both kinds of debt in proportion to its outstanding amount, following the ECB’s own “market neutrality” principle.

“We show that the difference between the two scenarios is quantitatively mild both for macroeconomic variables and pollution,” the researchers sad.

“In addition, even if QE is entirely targeted to green bonds, its expansionary effect also boosts brown production in the first periods, driving a slightly higher rise in pollution.”

The ECB has bought more than 300 billion euros worth of corporate bonds over the past four and a half years, making it a driving force in the euro zone market for company debt.