ECB sees rapid progress on carbon pricing: Lagarde

London — The European Central Bank sees rapid progress on carbon pricing as the EU Emissions Trading System is set to be aligned with the EU's stronger climate targets for 2030, the bank's president Christine Lagarde said Jan. 25.

A new chapter of more robust carbon price signals is set to begin as Europe seeks stronger climate action in the wider finance sector, Lagarde said in a speech at a conference on green banking in Frankfurt.

"[T]here are now signs that policy action to fight climate change is accelerating, especially in Europe. We are seeing a new political willingness among regulators and fiscal authorities to speed up the transition to a carbon-neutral economy, on the back of substantial technological advances in the private sector," Lagarde said.

A transformational energy transition is in Europe's economic and strategic interest, given the consequences to society of not taking action to deal with climate change, Lagarde told senior policymakers, bankers and investors at the event hosted by the Institute for Law and Finance.

"Scenarios show that the economic and financial risks of an orderly transition can be contained. Even a disorderly scenario, where the economic and financial impacts are potentially substantial, represents a much better overall outcome in the long run than the disastrous impact of the transition not occurring at all," she said.

Higher carbon prices

The ECB expects rapid progress on including the true social and environmental cost of carbon into the prices paid by all sectors of the economy, Lagarde said.

This can be achieved both through the EU ETS, through existing and new sectors, and by regulation for the non-traded sectors of the economy, such as transport, agriculture, buildings and waste, she said.

"The effective price of carbon is expected to rise if the EU's targets for reducing emissions are to be reached. Modelling by the OECD and the European Commission suggests that an effective carbon price between Eur40/mt and Eur60/mt is currently needed, depending on how stringent other regulations are," she said.

"The introduction of the ETS Market Stability Reserve and the review of the ETS scheduled for this year should provide the opportunity to deliver a clear path towards adequate carbon pricing," said Lagarde.

The EC is expected to make legislative proposals to overhaul the EU ETS in June, including aligning the system with the proposed stronger EU 2030 target to cut greenhouse gas emissions by at least 55% below 1990 levels, compared with the current 40% target, as well as expanding the system to new sectors including shipping.

The EU's 2030 goal is a key milestone on a longer road to reach a net-zero emissions economy by 2050.

EU carbon prices averaged Eur24.83/mt ($29.70/mt) in 2020 and increased to an all-time high of Eur35.42/mt Jan. 12, 2021 amid expectations of tighter supply of allowances as the system moved into its fourth trading phase from 2021-2030.

As well as the 2030 emissions targets, the EU's low-carbon ambitions include major strategies on hydrogen, offshore wind, a circular economy, clean transportation, low-carbon agriculture and buildings sectors and a carbon border adjustment mechanism.

ECB sets up climate change center

Lagarde's comments came as the ECB announced it would set up a climate center to bring together different parts of the bank to work on climate issues.

"This decision reflects the growing importance of climate change for the economy and the ECB's policy, as well as the need for a more structured approach to strategic planning and coordination," the ECB said in a statement Jan. 25.

The new unit's purpose is to shape and steer the ECB's climate agenda internally and externally in a raft of workstreams ranging from monetary policy to prudential functions, supported by staff with data and climate change expertise.

The climate center will be reviewed after three years, with an ultimate aim to incorporate climate considerations into the routine business of the ECB, the bank said.