GREEN MONETARY POLICY BETWEEN MARKET NEUTRALITY AND MARKET EFFICIENCY

Confronted with the challenges of climate change, the ECB adopted a Climate Change Action Plan in July 2021 and thereby joined, forces with Member States and EU institutions to support Europe's green transition to a CO2-neutral environment. The measures in the Action Plan aim to internalize climate risks, integrating sustainability-linked bonds into the monetary policy framework and hint at an even more active climate policy by way of preferential green bond purchases. This article analyses to what extent the mandate of the ECB allows for such a green monetary policy, focusing on the admissibility of monetary policy measures containing a "green bias" that discriminate against environmentally unsustainable or carbon-intensive economic activities. The ECB uses the principle of market efficiency to defend preferential green bond purchases. According to the ECB, as long as market participants do not yet adequately price in the costs of climate change and unsustainable economic activities, the ECB should step in and correct these market dysfunctionalities to ensure an efficient allocation of resources. This is a contested novelty in euro area monetary policy, since the ECB has so far adhered to the principle of market neutrality with regard to the allocation of its bond purchases.