Greening Q.E.

Abstract

Current implementation of Quantitative Easing (QE) by the European Central Bank (ECB) contributes to global warming and counteracts a transition to a carbon-free economy. The research formulates green alternatives for current QE policy that are consistent with the ECB’s mandate. Evaluation in a stock-flow-fund ecological macroeconomic model shows that global implementation of these alternatives can significantly contribute to a mitigation of climate change. Through lowering financing costs, green QE leads to higher shares of green investment and green capital, apparent immediately after implementation. More green capital leads to higher shares of renewable energy which leads to lower levels of carbon emissions. In the most extensive policy alternative, this results in a mitigation of atmospheric temperature rise of approximately 12% compared to a baseline scenario, to approximately 6% in a limited policy alternative. Macroeconomic performance or the stability of the financial system are not affected by these policies in the short to medium term, and positively in the long term. These effects justify a consideration on whether green QE should become ECB policy.