In response to a letter from certain members of the European Parliament, the European Central Bank (ECB) welcomed the recent proposal of European Commission on the “Fit for 55” package. This comprehensive package aims to support climate change mitigation through a wide range of policy elements, including enhanced carbon pricing and improved energy efficiency. Among other things, a more realistic carbon price is expected to set better incentives and foster a surge in innovation and investment, which is indispensable for a timely and cost-efficient transition to a carbon-neutral economy. Building on its previous analysis of the implications for the economy of climate change and related policies, ECB plans to take a careful look at the individual elements of the “Fit for 55” package.
The Fit for 55 package is a set of proposals to revise and update European Union legislation and to put in place new initiatives with the aim of ensuring that EU policies are in line with the climate goals agreed by the Council and the European Parliament. "Fit for 55" refers to the at least 55% emission-reduction target, which the European Union has set for 2030. The proposed package aims to bring the climate and energy legislation in line with the 2030 goal. The European Commission presented the package on July 14, 2021. ECB will assess how and through which channels the individual elements of the "Fit for 55" package are likely to affect the euro area economy. While existing evidence suggests that the effects of climate change and the transition to a carbon-neutral economy are likely to be substantial, there is considerable uncertainty regarding the channels through which these would have an impact on the euro area in general and inflation developments in particular. The impact on inflation is likely to be both direct and indirect, affecting not only the level of inflation but also its seasonality and volatility. For example, inflationary pressures could emerge from higher carbon prices and from firms passing on to customers the higher costs they incur in having to become more environmentally friendly or having to adapt their business models. Conversely, prices for renewable energy sources may decline further over time if more efficient technologies are developed.
The letter also highlights that ECB is committed to increasing its contribution to addressing climate change in line with its mandate. The new Climate Change Center of ECB will contribute to shaping and steering the climate agenda of ECB; this includes the analysis of the impact of European Union policies such as the “Fit for 55” package. The results of these analyses will be communicated in due course.
Keywords: Europe, EU, Banking, Climate Change Risk, Transition Risk, Carbon Neutrality, European Green Deal, Fit for 55 Package, ESG, Carbon Pricing, ECB
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