Climate change mitigation: how effective is green quantitative easing?

Raphael Abiry, Marien Ferdinandusse, Alexander Ludwig and Carolin Nerlich in this ECB paper:

This paper examines whether central banks – a monetary authority – can effectively contribute to mitigate global warming through green quantitative easing, i.e. through a shift of a monetary authorities’ privately-issued financial asset holdings towards the green sector of the economy. As a secondary question we further investigate the effectiveness of this policy in combination with fiscal policies – set by a fiscal authority -, more precisely, a carbon tax.

In our setup, green quantitative easing refers to a change in the portfolio allocation of a given outstanding stock of private sector securities (bonds) held by the monetary authority, towards bonds issued by the green sector.

We develop a two-sector incomplete markets integrated assessment model to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD per tonne of carbon is 4 times more effective.

Interesting..

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