(Bloomberg) -- Climate change, freak weather events and the energy transition will make it harder for the European Central Bank to properly gauge the euro zone’s economic health and set monetary policy, according to some of the institution’s latest research.
All three challenges are likely to affect potential output in the coming decades, Miles Parker, a senior ECB economist, wrote in a paper published Wednesday. That variable is a key input into quarterly projections that inform interest-rate decisions.
“Unmitigated climate change is substantially worse for potential output over the long run than the impact of the transition to net zero carbon,” Parker said. “Yet the transition itself may also reduce potential output, particularly in the near term.”
Economists are struggling to understand how climate change and strategies to counter it affect prices and firms’ capacity to grow. The International Monetary Fund estimates that, at least this decade, the costs involve faster inflation and weaker growth.
The “substantial localized impact” of climate shifts on specific regions and sectors, and uncertainty over firms’ and people’s reactions make the implications even harder to judge — especially as policy is set for the 20-nation euro area as a whole, according to Parker.
A separate ECB survey showed concerns about the implication of climate change over the next five years are “quite widespread” across euro-area companies. About 60% indicated transition risks related to stricter green standards are “very important.”
Half judged they’ve made sufficient investments to reduce their own carbon footprint, with almost a quarter planning to do so within the next five years. About a third spent money to mitigate the impact of natural-hazard risk.
At the same time, more than half said too-high interest rates or financing costs and insufficient public subsidies are “very important obstacles” to climate-related investment.
The ECB raised rates for a 10th straight time this month, bringing total tightening since July last year to 450 basis points.
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