Lane: Climate change accelerates, impacts ECB policy
Philip R. Lane of the ECB outlined how accelerating climate change impacts output, inflation, and the central bank's monetary policy. He detailed the ECB's efforts to integrate these factors into its economic analysis and forecasting.
Global warming's economic toll
Global warming is accelerating, with 2023-2025 confirmed as the hottest years on record, leading to more frequent and intense extreme weather events.
This causes substantial economic damage; analysis suggests global GDP per capita would be over 20 percent higher today without warming between 1960 and 2019, representing a 0.3 percent annual growth reduction.
Under current policies, the world is on a trajectory towards 2.8 degrees warming by 2100. The European Union has responded with ambitious climate targets, aiming for a 55 percent reduction in greenhouse gas emissions by 2030 and climate neutrality by 2050.
Both climate change and transition policies significantly impact output, inflation, asset prices, and financial stability.
In its 2021 Monetary Policy Strategy Review, the ECB's Governing Council committed to fully integrating these implications into its monetary policy and central banking framework.
Output and inflation under pressure
Extreme weather events disrupt production, energy supply, and labor, lowering potential output and dampening investment.
This trend is relevant for monetary policy's analysis of cyclical shocks.
Sectoral impacts vary across the euro area; firms in southern regions highlight natural hazard risks, often with low insurance coverage.
These events also increase inflation volatility, especially for food prices.
The 2025 summer heatwave increased euro area unprocessed food prices by 0.4 to 0.7 percentage points.
Future projections suggest food prices could rise by around 1.8 percentage points after an extreme summer in the 2060s climate, increasing food inflation volatility.
A growing mandate for central banks
Lane's speech confirms climate change as a core monetary policy concern, moving beyond a mere environmental issue.
Its detailed impact on output and inflation necessitates central banks fully integrate climate factors into their frameworks.
This evolving understanding will increasingly shape future policy decisions, extending central banking's traditional scope.