Elderson: Green transition essential to curb inflation, climate risks
Frank Elderson, Member of the ECB's Executive Board, highlighted how the green transition is crucial for mitigating inflation volatility and economic uncertainty. Speaking in Lisbon, he detailed risks from energy insecurity and climate change, alongside the benefits and barriers to achieving net zero.
Dual shocks fuel euro area uncertainty
ECB Executive Board Member Frank Elderson detailed how geopolitical conflicts and climate change are driving inflation volatility and economic uncertainty in the euro area.
Europe's reliance on imported fossil fuels makes it vulnerable to shocks like the recent war in the Middle East, which led to downward revisions in growth and upward revisions in inflation in the June Eurosystem staff projections for 2026 and 2027.
An adverse scenario projects 2027 economic growth to be 0.3 percentage points lower and inflation 0.7 percentage points higher than the baseline.
Beyond energy, climate and nature crises also pose significant risks.
ECB research estimates that the 2025 summer heatwave could increase euro area unprocessed food prices by 0.4 to 0.7 percentage points after one year, while nature degradation could add 0.5 percentage points to headline HICP inflation.
These extreme events have already caused over €200 billion in damage in Europe between 2021 and 2024, impacting economic activity and posing risks to financial stability.
Elderson noted that 75 percent of corporate loans in the euro area are critically dependent on at least one ecosystem service, underscoring the broad exposure of the banking sector.
ECB Banking Supervision has been engaging with banks since 2020 to ensure climate and nature-related risks are fully embedded in their governance and risk management.
Unlocking resilience through green transition
ECB Executive Board Member Frank Elderson argued that accelerating the transition to net zero carbon can bolster Europe's resilience and lessen economic impacts.
He highlighted significant progress in green technologies, making renewable sources now cheaper than fossil fuels across major European economies.
This transition is already yielding benefits, such as lower wholesale electricity prices in countries with high renewables penetration and substantial savings from reduced oil consumption by electric vehicles.
Elderson stressed that long-term benefits of net zero far outweigh the costs.
However, he identified key barriers, notably insufficient pricing of carbon emissions due to fossil fuel subsidies and unpriced externalities.
He clarified that central banks are 'climate and nature policy takers,' but overcoming these barriers directly supports their price stability mandate.
Climate: A new lens for price stability
Elderson's speech directly links climate and energy security to the ECB's price stability mandate, expanding its focus beyond financial stability.
The green transition is framed as an antidote to inflation volatility from fossil fuel reliance, offering a strong economic rationale for accelerated climate action.
While central banks are 'policy takers,' this implicitly advocates for robust governmental climate policies as essential for monetary stability.