MNI BRIEF: Net Zero Could Mean Easier ECB Policy- Study

Gradual carbon tax increases consistent with the International Energy Agency’s target of net-zero emissions by 2050 could cause GDP to fall by between 0.5-1.2% by 2030 relative to baseline, whilst also prompting the European Central Bank to adopt easier monetary policy than otherwise, a study published by the ECB reported Wednesday,

Average annual GDP growth would be just 0.1% lower over the same horizon, despite the dampening effect of higher energy costs on household consumption and company profits. The impact on inflation would be “modest” and diminish gradually, the study found, but is likely to be greater for near-term headline inflation, with price levels shifting upwards permanently by 2030.

“In balancing the demand and supply side effects, the monetary policy stance is somewhat loosened, as is evident from the fact that the interest rate in real terms declines across all models,” the authors conclude. “A central bank with a preference for “looking through” the direct carbon tax-induced inflation effects to mitigate output losses would have to tolerate higher headline inflation for a protracted period.”

A carbon tax would also generate extra government revenues of between 0.3 and 1.1% of GDP.