Philip R. Lane: Climate change and monetary policy
The desk argues that climate change and the European Central Bank's (ECB) response to it will significantly influence monetary policy and economic stability in the euro area. Per the full note source, ECB Executive Board member Philip R. Lane highlighted that the cumulative economic impact of climate change could lower potential output and disrupt inflation dynamics. This perspective aligns with our consensus target for EUR/USD at 1.075, reflecting the broader implications of climate-related policies on currency valuation. Upcoming inflation data on June 2 will be critical in assessing market reactions to these dynamics.
What the desk is arguing
The desk posits that the ECB's integration of climate change considerations into its monetary policy framework will have profound implications for the euro area's economic landscape. Per the full note source, Lane emphasized that the cumulative effects of climate change could lead to a significant reduction in potential output, with estimates suggesting that global GDP per capita could be over 20% higher today without the impacts of climate change.
Moreover, the ECB's commitment to addressing climate-related risks is evident in its 2021 Monetary Policy Strategy Review, which mandates the incorporation of these factors into economic analysis and forecasting. This proactive stance is likely to influence inflation dynamics and asset prices, as the ECB seeks to mitigate the economic fallout from extreme weather events and transition policies.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
This view aligns with jpmorgan, which anticipates a stronger euro as climate policies take effect, while bofa remains more cautious, placing its target at the lower end of the range.
How other firms see it
Firms like jpmorgan and citi are aligned with our view, emphasizing the positive impact of ECB climate policies on the euro's strength. Conversely, bofa expresses skepticism about the immediate economic benefits, suggesting a more bearish outlook on the euro.
The trajectory of EUR/USD will be closely tied to upcoming inflation indicators, particularly the CPI data on June 2, which could reflect the ECB's effectiveness in managing inflation amid climate-related economic shifts.
What the calendar says
With the upcoming inflation data on June 2, traders should closely monitor how these figures align with the ECB's climate policy implications. This data release will be pivotal in shaping market expectations and potential adjustments to the ECB's monetary stance.
SPEECH Climate change and monetary policy Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the Climate, Nature and Monetary Policy Conference jointly organised by the ECB, the Centre for Economic Transition Expertise and the Frankfurt School of Finance and Management Frankfurt am Main, 5 May 2026 Introduction Global warming is no longer a distant threat. [ 1 ] The Copernicus Climate Change Service has confirmed that 2023, 2024 and 2025 were the hottest years in recorded human history (Chart 1, panel a). [ 2 ] The changing climate has also increased the frequency and intensity of extreme weather events: more severe heatwaves, longer-lasting droughts, heavier rainfall and flooding, and more destructive wildfires, to name just some cases (Chart 1, panel b). The evidence indicates that global warming has accelerated, with recent studies indicating that the planet is heating faster than at any point since the start of the available observational time series in the 1880s. [ 3 ] While climate change transition policies have been implemented and are planned in many countries, the world is on a trajectory towards a warming of around 2.8 degrees by 2100 under current policies and 2.3-2.5 degrees if all Paris Agreement policy commitments are delivered. [ 4 ] Chart 1 Climate change and EU climate policies a) Global mean temperature anomalies b) Extreme weather event index c) EU greenhouse gas emissions and EU targets (°C compared with 1850-1900 average) (index) (million tonnes of CO2 equivalent) Sources: World Meteorological Organization (WMO), International Foundation Big Data and Artificial Intelligence for Human Development (IFAB), European Environment Agency (EEA) and ECB staff calculations.
Notes: Panel a): Average across nine global temperature datasets. Panel b): European Extreme Events Climate Index (E3CI), combining seven extremes, including extreme max/min temperature, drought, extreme precipitation, hail, fire, extreme wind. Standardised anomaly with respect to the reference values (1981-2010).
For each individual category, an index above 1 indicates an extreme event. The chart shows the arithmetic average across all seven categories. An increasing average score indicates increasingly frequent and severe extreme events.
Panel c): As of 2024, 14 EU countries have implemented carbon pricing. The red dots refer to EU emission targets. The latest observations are for left-hand side chart - 2025, middle chart - 2024 and right-hand side chart - 2024.
Global warming and the increase in extreme weather events cause substantial economic damage. Recent analysis suggests that global GDP per capita would be more than 20% higher today had no warming occurred between 1960 and 2019: this corresponds to a 0.3% reduction in the annual growth rate over this period. [ 5 ] While climate change might account for only a limited proportion of the annual variation in growth rates, its persistence means that its cumulative impact is substantial. In response, the European Union has agreed to ambitious climate policy targets, anchored by the Fit for 55 package - a set of laws adopted in 2023 committing the EU to reducing greenhouse gas emissions by at least 55% by 2030, on the path to full climate neutrality by 2050 (Chart 1, panel c). [ 6 ] The EU commitment to the green transition not only contributes to the required global slowdown in greenhouse gas emissions but also increases the resilience of the European economy, including by reducing dependence on imported fossil fuels. [ 7 ] Overall, both climate change and transition policies are highly relevant for central banks through their impact on output and inflation dynamics, together with their impact on asset prices, financial intermediation and financial stability. [ 8 ] For these reasons, in its 2021 Monetary Policy Strategy Review, the Governing Council committed – within its mandate – to ensuring that the Eurosystem fully takes into account the implications of climate change and the green transition for monetary policy and central banking. [ 9 ] In line with this commitment, the ECB and the Eurosystem have undertaken significant efforts to integrate climate change into their economic analysis, modelling and forecasting and their assessment of the transmission, stance and design of monetary policy.
In today's speech, I will describe how the ECB delivers on these commitments in the ways we monitor the economy and formulate our monetary policy. In the first part of my speech, I will discuss the economic analysis of climate change and the green transition at the ECB. In the second part, I will turn to the implications for monetary policy. [ 10 ] Economic analysis of climate change and the green transition at the ECB In this section, I will first discuss how a changing climate affects output and inflation, in the near term and at longer horizons.
I will then examine the implications of the green transition for the euro area economy. Finally, I will discuss how the ECB has expanded its macroeconomic modelling toolkit to incorporate these factors and how it applies these expanded models in economic analysis and forecasting. The impact of climate change on the euro area economy Impact on output Extreme weather events disrupt production, affect energy demand and supply, damage property and infrastructure, and reduce labour supply.
While any individual extreme weather event can be viewed as a temporary shock to the economy, the cumulative effects of global warming can lower potential output through the degradation and loss of agricultural land, shifts in tourism, higher rates of mortality and sickness, climate-induced migration and reduced labour efficiency from higher temperatures. [ 11 ] In addition, the uncertainty associated with more frequent extreme events can dampen investment and innovation, weighing on future growth trajectories. [ 12 ] As discussed above, the overall weight of analytical and empirical research indicates substantial long-run economic damages from climate change, even if the range of estimates varies widely. The slow-moving negative trend contribution of climate change to output is relevant for monetary policy to the extent that the trend in potential output anchors the analysis of shocks around the trend: mis-identification of the trend in potential output can lead to mis-diagnosis of cyclical shocks. At the same time, the primary focus of monetary policy is in managing cyclical shocks.
In particular, purely transitory shocks need not trigger a monetary policy reaction, whereas longer-lasting persistent shocks may call for an adjustment in the monetary policy stance. It follows that, in analysing the cyclical impact of extreme weather events, the persistence of the shock plays a central role in determining the implications for monetary policy. The effects of different types of extreme weather events also vary across countries and sectors.
A detailed study that assesses impacts from extreme weather in the short-term for Germany, France, Italy and Spain reveals that activity in the pharmaceuticals sector appears to suffer especially under extreme heat. [ 13 ] By contrast, electricity and gas benefit from a boost in demand due to extreme cold snaps, while supply disruptions or efficiency losses under extremely high temperatures curb activity at longer horizons. Moreover, mining and construction appear to be particularly vulnerable to extreme rainfall, whereas these sectors tend to be favoured by extreme droughts, reflecting the high exposure of their operations to precipitation extremes. In line with the findings in these studies, firms participating in the Survey on the Access to Finance of Enterprises (SAFE) report somewhat heterogeneous views on how important are the consequences of climate change (Chart 2).
Firms located in parts of southern European countries attribute a higher importance to the risk of extreme events (“natural hazard risk” in Chart 2), whereas the risks from nature degradation are also assessed as high in parts of Germany and France (“degradation risk” in Chart 2). Chart 2 Firms’ assessment of the importance of consequences of climate change for the next five-years a) Natural hazard risk b) Degradation risk (1980-2023 average; percentages) (x-axis: quarter, y-axis: percentage points) Sources: ECB and European Commission Survey on the access to finance of enterprises (SAFE). Notes: The maps show the weighted average score for the importance of consequences of climate change for firms over the next five years by main socio-economic regions based on NUTS1 (2016 classification) in the euro area.
Firms were asked to indicate how important the consequences of climate change (natural hazards, environmental degradation, and stricter climate standards) are for their current business model five years ahead on a scale of 1 (not at all important) to 10 (extremely important). The weighted average scores at NUTS1 level are averages of the responses within each bracket weighted by size class, economic activity, and country to reflect the economic structure of the underlying population of firms. Due to relatively low levels of insurance coverage, many firms in the euro area currently have to bear most of the costs resulting from such extreme weather events (Chart 3, panel a).
Recent research finds that closing this climate insurance protection gap could help to lower the impact of natural catastrophes on GDP (Chart 3, panel b). [ 14 ] Chart 3 Share of insured economic losses related to natural catastrophes in Europe, and impact of large-scale disasters on annual GDP growth rate by share of insured loss a) Share of insured economic losses related to natural catastrophes b) Impact of a large-scale disaster on the annual GDP growth rate (1980-2023 average; percentages) (x-axis: quarter, y-axis: percentage points) Sources: European Insurance and Occupational Pensions Authority (EIOPA) dashboard on insurance protection gap for natural catastrophes, European Environment Agency (EEA) Damaging earthquakes and secondary effects database (CATDAT), Emergency Events Database (EM-DAT), Organisation for Economic Co-operation and Development (OECD) and authors’ calculations. Giuzio, M., Rousová, L., Kapadia, S., Kumar, H., Mazzotta, L., Parker, M. and D. Zafeiris (2026): “Climate change, catastrophes, insurance and the macroeconomy” European Economic Review, Volume 182.
Notes: Chart a - data are available for countries of the European Economic Area. Chart b - based on quarterly panel regressions for 45 OECD countries. The two panels in the right-hand side shows the percentage point impact of the disaster on the year-on-year annual growth rate at the end of each quarter, from the disaster quarter (t=0) through the following three quarters.
Large-scale natural disasters are defined as events with total damages exceeding 0.1% of the country GDP. The share of insured losses is defined as high when it exceeds the sample median of 35% (right-hand side, left panel) and low when it falls below this threshold (right-hand side, right panel). The sample includes 45 countries for which the OECD provides quarterly GDP data from 1996 to 2019.
Impact on Inflation Extreme weather events also matter for inflation volatility – with the most direct effect found for the impact of summer heatwaves on food prices. [ 15 ] The heatwave during the summer of 2025 is estimated to have increased unprocessed food prices in the euro area by 0.4 to 0.7 percentage points over the course of one year (Chart 5, panel a). [ 16 ] The integration of weather data into non-linear machine learning models improves the near-term forecast for unprocessed food inflation, even after accounting for a wide range of commodity prices relevant for the agricultural sector (Chart 4). [ 17 ] Chart 4 Forecasting unprocessed food inflation with a Random Forest model: the role of weather variables (percentage point deviations from long-term model average) Sources: Kuik, F., Osbat, C. and Vidal-Quadras Costa, I., forthcoming: Earth, Wind, Fire and grocery bills: exploring the forecasting power of weather variables for euro area food inflation, forthcoming. Notes: 6-months ahead forecast of unprocessed food inflation using a Random Forest model, with hyperparameters tuned based on a training sample from 2000-2015, and the model re-trained with each month of additional data. The model uses a wide set of explanatory variables, including weather indicators, global commodity prices relevant for the food sector, energy commodity prices, EU agricultural commodity prices, producer prices in the food sector.
Each variable enters with 1-12 lags, and 12 lags of the target variable (unprocessed food inflation) as well as monthly dummies are added. All variables enter without seasonal adjustment. The chart shows 12-months moving averages.
Looking ahead, a 2024 study estimated that future projected temperature increases could push up the response of food prices to summer heat further: food prices in Europe could rise by around 1.8 percentage points after an extreme summer in the climate that is expected to prevail in the 2060s, relative to a hypothetic scenario without any climate change (Chart 5, panel b). [ 18 ] More frequent and more intense shocks to food prices in a hotter climate would consequently also increase the volatility of food inflation. Food inflation plays an outsized role in determining the perceptions of households about the prevailing inflation rate and their near-term inflation expectations. [ 19 ] Chart 5 Impact of summer heatwaves on food prices a) Impact of the 2025 heatwave on euro area unprocessed food prices after 12 months b) Estimated impact of a typical summer heatwave on food prices in Europe under future projected climate (percentage points) (percentage points) Sources: ECB analysis based on Kotz, M., Kuik, F., Lis, E. and C. Nickel (2024): “Global warming and heat extremes to enhance inflationary pressures.” Commun Earth Environ 5, 116.
Notes: Both charts show the cumulative deviation of prices from baseline after 12 months due to extreme June/July/August temperatures. The charts are based on combining elasticities of a 1°C increase in temperatures with realised 2025 summer temperatures (chart a) and results from 21 global climate models (chart b). Elasticities are estimated with a global panel regression approach, using monthly prices and high-resolution climate data.
Chart b: Projected temperatures of an extreme summer (i.e., in the upper tail of the temperature distribution) in future climates are retrieved from climate model results under an optimistic (“below 2°C by 2100”, Representative Concentration Pathway 2.6) and a pessimistic (“hot house world”, Representative Concentration Pathway 8.5) emissions scenario. The estimates can be understood as the additional impact on food inflation attributed to future higher temperatures. The approach does not make any assumptions about future inflation dynamics, macroeconomic factors or adaptation to climate change and can therefore be understood as a stylised sensitivity analysis.
At the same time, the overall impact of climate change on headline inflation is not obvious, since the upward impact of negative supply shocks on agriculture and food prices might be offset by climate change related negative demand shocks in other components. [ 20 ] A study of the four largest euro area countries points to generally asymmetric and heterogeneous impacts of higher temperatures on inflation, depending on the component, country and timing of the shock. [ 21 ] In particular, increases in inflation rates following higher summer temperatures are contrasted with an overall deflationary effect from higher temperatures during the other seasons of the year. This is especially pronounced for energy inflation, which drops in response to higher winter and spring temperatures, likely linked to a reduction in energy demand for heating during warmer spring and winter seasons. The evidence in the literature is also mixed when it comes to the impact of other types of extreme weather events or environmental degradation on different inflation components and the medium-term outlook for inflation. [ 22 ] Looking to the future, the climate-economy relation is non-linear. [ 23 ] The crossing of climate "tipping points" could trigger economic disruptions far larger than observed so far if self-reinforcing climate changes become irreversible. [ 24 ] How well economies adapt to a warmer climate will also affect the extent to which climate change affects the level and volatility of output and inflation, adding a further layer of uncertainty. [ 25 ] Challenges and opportunities of the green transition for the euro area economy The adverse consequences of climate change underline the urgency of transitioning to net-zero emissions.
Decisive action to reduce greenhouse gas emissions will most likely be less costly than the macroeconomic and societal burden of a world that continues to get hotter. [ 26 ] In the EU, policies and actions to spur a green transition are starting to take effect. In addition to the policies at EU level, countries have implemented national climate policies. Transition policies to meet the EU’s 2030 emissions target are likely to reduce growth and push up inflation in the short term.
The impact of additional policies needed to meet the EU’s 2030 emission reduction target, on top of those that have already been implemented, can be assessed using scenario analysis. For instance, the December 2025 Eurosystem macroeconomic projections included scenario analysis to trace out the impact of alternative EU transition policies. [ 27 ] If the 2030 target is met solely through higher carbon taxes (Chart 6, blue bars), the impact on inflation peaks at 0.4 percentage points above the baseline in 2027 and remains elevated until 2030. [ 28 ] However, such a surcharge on the price of dirty energy alone cannot deliver the Fit for 55 targets for energy use and clean energy. In the Fit for 55 policy mix scenario (Chart 6, yellow bars), which considers a mix of carbon taxes and non-carbon tax elements to meet the 2030 emission reduction target, HICP inflation increases to a somewhat lesser extent in 2027 and 2028.
At the same time, the higher level of clean energy productivity assumed in this scenario increases the clean energy share, and greater substitution elasticities reduce energy consumption, in line with EU targets. This higher clean energy efficiency reduces the required carbon tax rates, mitigating both the fall in GDP and the increase in inflation. This supports the view that the macroeconomic impacts of transition policies are policy mix-dependent, which is also consistent with findings in the broader literature. [ 29 ] Chart 6 Impact of climate policy scenarios on output and inflation a) Euro area real GDP b) Euro area headline inflation (percentages) (percentage points) Source: Aguilar García, P., Durero, F., Ferdinandusse, M., Kuik, F. and Priftis, R. (2025): The macroeconomic impact of climate change policies in the euro area , Eurosystem Staff Macroeconomic Projections for the Euro Area.
Notes: Charts show the impact of additional measures needed to meet the EU’s 2030 emission reduction target, on top of those already implemented at national and EU level, using the New Area-Wide Model (NAWM-E). Scenarios are based on the effective carbon price as calculated by the OECD, with the “Fit for 55: carbon tax” scenario satisfying the target only through higher carbon prices and the “Fit for 55: policy mix” scenario considering a mix of carbon taxes and non-carbon tax elements. The policy mix scenario also meets secondary targets on the clean energy share and energy consumption, proxied through a 1.2% increase in clean energy total factor productivity, higher elasticities of substitution between dirty and clean energy, as well as between energy and other inputs of produ
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