Central banks’ targeted refinancing operations and the climate transition

Central banks have an interest in supporting an orderly transition to a low-carbon economy, as this would minimize the economic and financial risks posed by climate change. However, the literature has shown that monetary policy measures can have a pro-carbon bias. This article focuses on the climate impact of central bank refinancing operations by taking the third ECB’s Targeted Longer Term Refinancing Operations (TLTRO III) program as a case study. In particular, by combining sectoral emission data with information on banks’ take up and lending, we provide an assessment of its carbon footprint. We then use a theoretical model to show that a green credit-easing scheme in the euro area could increase banks’ costs for lending to polluting companies and, hence, re-direct loans to less-polluting firms. However, the financial stability implications of such a policy should be carefully considered, as well as the related legal and operational challenges.