The ECB can end energy inflation for good. So why isn’t it?

The European Central Bank (ECB) has the tools to support the energy transition and, with it, uphold its own price stability mandate. However, at a time when fossil fuel dependence is driving another affordability crisis, there is a continued lack of political will from EU institutions - including the European Parliament, who provide an annual review of the ECB’s work. Politicians need to ask for a more ambitious effort from the ECB role to support the energy transition to help lower prices, strengthen industrial competitiveness and ease the cost of living.

Another winter, another affordability crisis

Winter is coming. With it comes a new affordability crisis driven by fossil fuel dependence.

Over the past weekend, people across France, Italy, Belgium and Portugal were on the streets protesting  as they struggle with rising prices. Inflation in September was estimated at 3.8%, with energy inflation at 18.8%. Rising gas, oil and diesel prices are pushing up costs across the economy - again.

As temperatures fall across the EU, gas prices are at their highest since the start of the US-led war on Iran. With supplies constrained by the de facto closure of the Strait of Hormuz, the EU faces the risk of a winter gas shortage. Oil and diesel prices have also soared following disrupted shipments and US threats of export restrictions.

People and businesses are paying the price of Europe’s prolonged reliance on fossil fuels and we are not the only ones saying this. ECB Executive Board member Frank Elderson has repeatedly highlighted the consequences for price stability and economic resilience. So, what’s the solution? Again, Elderson hits the nail on the head “cutting reliance on imported fossil fuels and accelerating an orderly shift to home-grown clean energy”.

That shift requires a financial system geared towards investment in renewable energy and electrification. Yet too little attention is paid to a group of public institutions at the heart of money and finance. Central banks can play a pivotal role in supporting the transition - and the ECB is no exception.

How, and why the ECB is not doing more, is what we explore in this blog.

Towards greening central banking

Central banks help to keep prices and the financial system stable. Climate change and fossil fuel dependence makes this job harder. Extreme weather and rising temperatures can drive up food prices and reduce the value of physical and financial assets. 

Fossil fuels matter not only as the main source of global warming, but also because their volatile prices threaten economic stability. When supplies are disrupted fuel and electricity prices can soar, pushing up inflation. If interest rates rise in response, households and energy-intensive firms face higher borrowing costs on top of higher energy bills, increasing the risk of loan defaults.

Monetary policy is not neutral, as it shapes our ability to escape this cycle. As we have seen already , electrification and a greater share of renewables can help shield our economy from future fossil fuel shocks. Yet these investments require substantial upfront spending, making them particularly vulnerable to higher borrowing costs. The effort of central banks to reduce inflation today can therefore weaken our resilience to inflation tomorrow.

Central banks increasingly recognise the relevance of climate change for monetary policy. The creation of the Network for Greening the Financial System in 2017 helped put climate risks on their agenda. In 2021, the ECB adopted a climate action plan, while the central banks of Japan and China introduced targeted financing support for green lending. A year later, ECB Executive Board member Isabel Schnabel coined the terms ‘climateflation’ and ‘fossilflation’.

But recognising a problem is not the same as tackling it. 

As our Green Central Banking scorecard shows, approaches and levels of commitment vary widely. Most central banks have taken a narrow, risk-based approach, focusing on exposure to physical and transition risks. There is a big difference between managing the consequences of climate change and supporting the investment needed to address it.

The ECB: the diagnosis is right, but where is the treatment?

The ECB’s approach has been mixed. It has stepped up efforts to assess how climate change and fossil fuel dependence affect price and financial stability. The ECB is also increasingly considering climate-related risks in the assets that banks pledge as collateral, and penalising banks for shortcomings in their assessment of climate-related and environmental risks.

Under President Lagarde, the Bank has been vocal about the threat posed by climate change. It has also increasingly, though cautiously, highlighted how faster renewables deployment could reduce fossil fuel dependence and energy prices. 

The diagnosis is right. But a diagnosis alone does not cure a disease. The ECB should use its mandates and tools to support a response that matches the scale of the problem.

The connection to the mandates is clear. Addressing the causes of fossil fuel dependence on inflation is directly relevant to the ECB’s primary mandate to safeguard price stability. So is considering whether its own policies discourage investment that could reduce future inflation risks. The ECB also has a secondary mandate: to support the EU’s general economic policies, including environmental protection, without prejudice to price stability.

Proportionality matters too. The ECB’s measures must be suited to their objectives and avoid disproportionate side effects. If higher interest rates discourage investment that would reduce exposure to fossil fuel shocks, the ECB cannot simply leave that consequence out of the picture.

Critics argue that a stronger climate stance would conflict with market neutrality - the idea that the ECB’s operations should reflect the market without favouring particular sectors. But market neutrality is in no way part of the ECB’s mandate. The bank itself has recognised that mirroring a distorted market can reinforce its distortions, and that part of its work is also addressing these distortions.

The tools are already there

Start with a cheaper interest rate for the energy transition.

The most immediate step would be to offer banks a discounted refinancing rate linked to green lending, moving in tandem with the main policy rate. This would cushion investment in the transition against higher financing costs, while allowing the ECB to adjust its broader interest rates in pursuit of price stability.

The ECB already has a model in its toolkit: targeted longer-term refinancing operations (TLTROs), which have offered banks favourable borrowing terms linked to their lending to the real economy. A green version could link those terms to lending for renewable energy, grid expansion and electric vehicles, for example. This would help protect clean energy investment from further rate hikes.

Then give green financing a lasting place in the operational framework.

This should not be a one-off emergency response. Preferential financing for green lending could become a lasting part of the ECB’s operational framework, which determines how it supplies liquidity to banks. When it revised that framework in 2024, the ECB committed to incorporating climate considerations into its structural operations. Two years later, the lack of detail on implementation is troubling.

Our analysis also suggests that green structural operations will account for only a small share of the liquidity provided to banks. The ECB’s decision to wait until its balance sheet is smaller, before introducing them, risks further delay at a time when action is urgent. These choices are not purely technical: they reflect how the ECB understands its role and its institutional room for manoeuvre. To better support the transition, the ECB should give green structural operations a larger role and introduce them sooner.

Finally, take climate risks seriously in collateral rules.

The collateral framework determines which assets banks can pledge when borrowing from the ECB and how those assets are valued. It is another powerful tool already on the table.

In 2025, the ECB announced a climate factor to protect its balance sheet against potential losses on corporate bonds arising from climate change and the transition to a low-carbon economy. In 2026, it extended the factor to corporate loans.

This is a useful step, but the climate factor could go further. Its coverage should be extended beyond the assets currently in scope, which account for less than a third of the total. The maximum 5% adjustment to collateral value also warrants scrutiny:  Is that enough to reflect the potential losses associated with companies’ failure to transition?

A climate factor should do more than acknowledge that climate risks exist. It should be strong enough to address their root causes: this is why the ECB should also limit the share of high-emissions assets accepted as collateral completely.

Wanted: political will

If the ECB recognises the risks of fossil fuel dependence and has tools to address them, why is it not doing more?

The answer lies in its relationship with the EU’s broader political and institutional context. The Treaties establish the ECB’s independence, giving it considerable discretion in how it pursues price stability and chooses instruments within its mandate. But the bank does not operate in a political vacuum.

The problem is twofold. Inside the ECB, some members of the Governing Council remain reluctant to support a more proactive approach, possibly reflecting narrow, outdated interpretations of the bank’s mandates.

Outside it, EU institutions and some member states seem to have deprioritised the energy transition, overlooking its potential to improve affordability and competitiveness. That retreat matters for the ECB too: while the bank needs no political permission to act within its mandate, political backing can lend legitimacy to a more proactive approach, and pressure to act when it hesitates.

Accountability mechanisms are one key way for the ECB to ‘read the room’. They allow politicians to question the bank’s decisions and make their priorities heard without directing monetary policy. The European Parliament’s annual resolution on the ECB is one such opportunity. Its words - and its silences - send a strong signal about the role policymakers expect the bank to play.

This year’s draft report, for instance, does not acknowledge fossil fuel dependence as a driver of the current inflation episode. Nor does it discuss the tools the ECB could use to support the energy transition and, with it, its own price stability mandate (for more on the draft report, check out our latest blog). At a moment when fossil fuel dependence is driving another affordability crisis, this kind of silence leaves the case for a stronger ECB response without the political backing it needs.

The ECB has room to act and the tools to do so. It should use them. Politicians, meanwhile, should exercise democratic oversight of its choices and press for a more ambitious ECB role in supporting the energy transition to lower prices, strengthen industrial competitiveness and ease the cost of living.

In the next blog, we’ll look at another crucial thing the ECB and governments should do: speak to each other!