The Transition to Net Zero - A Challenge for Central Banks
Russia’s invasion of Ukraine has given new impetus to Europe’s ambition of achieving “strategic sovereignty,” including—crucially—weaning itself off Russian energy. The green transition has become a focal point to not only deliver the region’s climate objectives, but also increase its energy self-sufficiency. This will not happen overnight, and the path to net zero will evolve over the coming decades, likely accelerated by the recent conflict.
This paper looks at the potential consequences for inflation in the euro area over the transition period to net zero, and implications for monetary policy. The punchline is that both the physical effects of climate change such as extreme weather events, and climate mitigation strategies such as carbon taxes will further challenge the job of central banks in achieving price stability.
