In a keynote speech, European Central Bank Executive Board member Frank Elderson argued that accelerating the transition to net zero carbon would help shield the euro area from two major sources of inflation volatility and economic uncertainty: fossil fuel shocks linked to the war in the Middle East and rising climate and nature-related risks. He said central banks need to reflect those risks in inflation forecasts and financial stability analysis, while stressing that the ECB is a climate and nature policy taker rather than a policymaker in those fields. Elderson cited Eurosystem scenarios showing that a stronger and more persistent energy shock from the Middle East conflict could leave 2027 euro area growth 0.3 percentage points lower and inflation 0.7 percentage points higher than the baseline, while a severe scenario would push Harmonised Index of Consumer Prices inflation above 6% in early 2027. He also pointed to ECB and Eurosystem research indicating that the 2025 summer heatwave could raise euro area unprocessed food prices by 0.4 to 0.7 percentage points after one year, and that acute nature-related disruptions such as a decline in pollination could add as much as 0.5 percentage points to headline inflation. On supervision, he said ECB Banking Supervision has been pressing banks since 2020 to embed climate and nature-related risks in governance, strategy, risk management and stress testing, and that although practices have improved, more work is needed across material portfolios, exposures and risk categories. He said an orderly and relatively low-cost transition requires a broader policy mix to overcome four barriers: underpricing of carbon emissions, regulatory uncertainty and fragmentation, limited access to risk capital, and visible upfront costs for households. The measures he highlighted included preserving the credibility of the European Union Emissions Trading System and introducing ETS2 in 2028, simplifying rather than deregulating rules, completing the Single Market and the savings and investments union, speeding renewable permitting, and investing in grids, storage, smart meters, electric vehicles and heat pumps as part of a stronger European Energy Union.
European Central Bank2026-07-02
European Central Bank's Elderson links green transition to lower inflation volatility and calls for carbon pricing and investment reforms
In a speech, ECB Executive Board member Frank Elderson said faster progress to net zero would reduce euro area inflation volatility and economic vulnerability by cutting dependence on imported fossil fuels and limiting climate and nature-related shocks. He said this requires credible carbon pricing, less fragmented regulation, deeper capital markets, faster permitting and stronger energy infrastructure, while banks must continue strengthening climate and nature risk management.