Cutting fossil fuel dependency could help curb inflation, says ECB’s Sleijpen

Climate change is no longer a future risk that the world needs to prepare for but “a shock we already need to absorb.”

Speaking as the chair of the Network for Greening the Financial System (NGFS), a group of international financial supervisors, Sleijpen said accounting for climate change risk is the responsibility of central bankers, because it affects inflation, credit risk and the stability of the financial system.

Extreme weather is already costing economies, with one NGFS study showing it caused losses of up to 57% of GDP and inflation increases of up to 17%.

“A risk that affects all of those things is not somebody else’s risk. It sits squarely within the responsibilities of central banks and supervisors,” he said.

With scientific evidence showing that the world is very likely to overshoot the 1.5C limit, the economic future is bleak, Sleijpen said, citing NGFS research showing that regional climate disasters in the next three to five years could lower GDP by as much as 12.5% in some regions.

“If we only focus on adaptation, global warming and its effects will continue to intensify. And this may bring us to a point where adaptation is no longer possible,” he said.

Instead, adaptation should go hand in hand with mitigation, adding that limiting further warming and “accelerating the energy transition, should be our primary focus,” Sleijpen said.

He said dependency on fossil fuels not only increases greenhouse gas emissions but also causes price shocks in fossil-fuel-dependent economies.

Many countries have struggled with rising inflation driven by volatile energy prices caused by the US-Israel war in Iran. A recent report by Greenpeace found that energy prices were the main driver of inflation in the eurozone.

“Reducing the dependence on fossil energy will make importing economies less vulnerable to energy price volatility and to disruptions in the supply of energy,” said Sleijpen, adding that fossil fuel use should be cut to a level consistent with net zero greenhouse gas emissions.

“That makes renewable energy more than an instrument of climate policy. It makes it an instrument of economic resilience,” he said.

His comments echo those of other central bankers, including outgoing European Central Bank president Christine Lagarde.

In a recent ECB blog post, Lagarde noted that Europe needs a power system with “cheap, home-grown clean electricity” and urged Brussels to make it easier for firms to generate their own power. She also called for an increase in climate insurance coverage through an EU-level public-private reinsurance scheme. While some member states have such schemes already in place, such as Spain, the EU has a large insurance gap for extreme weather events.

“This summer will not be the last of its kind. Extreme heat will return more often and with greater force, and its costs will fall hardest on those least able to bear them,” Lagarde warned.

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Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.