Decarbonising is easy: beyond market neutrality in the ECB's corporate QE

Christine Lagarde, the President of the European Central Bank (ECB), has recently promised to explore every avenue for greening the ECB’s operations, including its quantitative easing (QE) programme. Yet the current corporate QE programme remains biased towards carbon-intensive sectors: these sectors are over represented in the ECB purchases, when compared to their contribution to the euro area employment and economic activity. An important consequence of the carbon bias is that it may lower the cost of borrowing (an implicit subsidy) and encourage more debt issuance by the most carbon intensive firms relative to low carbon firms. By favouring access to finance for highly polluting companies, this carbon bias is an important barrier to the decarbonisation of the euro area economies. We argue that the ECB should abandon its market neutrality approach, the key driver of this carbon bias, and adopt alternative low-carbon strategies. We suggest two such strategies in which carbon-intensive bonds are replaced with more climate-friendly bonds. These strategies would significantly reduce the climate footprint of the ECB corporate QE and would make companies’ access to finance more aligned with the targets of the Paris Agreement