Lane: Climate change impacts output, inflation, ECB policy
Philip R. Lane, Member of the Executive Board of the ECB, outlined how climate change and the green transition are impacting the euro area economy and the central bank's monetary policy. Speaking at a conference in Frankfurt, he detailed the ECB's integration of climate factors into its analysis and policy framework.
Climate's economic toll
Global warming is no longer a distant threat, with 2023, 2024, and 2025 confirmed as the hottest years on record.
This accelerating warming has intensified extreme weather events, causing substantial economic damage.
Analysis suggests global GDP per capita would be over 20% higher today without warming between 1960 and 2019, reflecting a 0.3% annual growth rate reduction.
In response, the European Union has committed to ambitious climate policy targets, including a 55% reduction in greenhouse gas emissions by 2030 through the Fit for 55 package, aiming for full climate neutrality by 2050.
These policies not only curb emissions but also enhance the resilience of the European economy by reducing reliance on imported fossil fuels.
Monetary policy's green lens
Climate change and transition policies are highly relevant for central banks, impacting output, inflation, and financial stability.
The ECB's Governing Council committed in 2021 to fully integrate climate change implications into monetary policy.
Lane outlined how extreme weather events disrupt production, affect energy supply, and can lower potential output.
These events also contribute to inflation volatility, with summer heatwaves increasing food prices.
For instance, the 2025 heatwave raised euro area unprocessed food prices by 0.4 to 0.7 percentage points.
The ECB has expanded its macroeconomic modelling toolkit to incorporate these climate factors into its economic analysis and forecasting.
A mandate stretched thin
While the ECB's analytical efforts are commendable, the direct policy implications remain complex.
Climate change primarily presents supply-side shocks and long-term structural shifts, which are difficult for conventional monetary tools to address effectively.
This extensive research underscores the challenge of aligning a price stability mandate with broader environmental goals.