MNI INTERVIEW: Green Price Rises Likely Capped-BOI's Angelini

MNI (ROME) - Governments are likely to act to contain any spiralling increase in energy costs triggered by the green transition, despite consensus that it will prove inflationary in the short term, Bank of Italy Deputy Governor Paolo Angelini told MNI.

“Governments do not like energy price increases. During the recent gas crisis in the EU, spikes in gas prices were largely offset by fiscal subsidies, even at the risk of straining public finances,” Angelini said in an interview.

On the other hand, subsidies for fossil fuels remain widespread, while global carbon pricing, which he sees as the most effective way to reduce carbon emissions, averages USD5 per tonne of CO2 equivalent, well below what Angelini said is needed to affect incentives.

The cost of new investment and carbon pricing tools means the green transition is likely to push energy prices higher in the short term, but its longer-term impact on inflation will depend on various factors, including “hard-to-predict technology developments, and policy choices on key trade-offs” such as the balance between energy security and affordability, particularly in light of current geopolitical tensions, he said.

Central Banks need to adapt forecasting models to better account for these factors, he added.

PRICE STABILITY

“Important areas for further work are energy prices, which have first-order impacts on headline inflation and may become more volatile in the future, and the effects of climate physical risk on the economy,” Angelini said, stressing that the best contribution that central banks could make to addressing these challenges would be to ensure price stability.

He was doubtful about the effectiveness of monetary tools to fund the transition, such as by providing a green version of the ECB’s cheap Targeted Longer-Term Refinancing Operations for banks.

“These policies and tools are de facto an alternative for government subsidies, and it is not clear why monetary policy should enter this realm and not other policy issues,” he said, noting that the success of similar schemes in China and Japan has not yet clearly established.

Central bank policy makers are “not the first recourse for this particular task and should heed the risk of providing world governments an excuse for delaying the most needed public policies,” Angelini said. “Monetary policy is not the best tool to tackle the issue of climate change.”

However, the European System of Central Banks’ mandate within the EU allows for the exploration of such tools, and given the scale of the climate challenge, Angelini acknowledged that everyone must contribute. The Bank of Italy is collaborating with other stakeholders to improve the measurement of climate change, enhancing data quality and availability, and to better direct resources to “nudge the transition and to understand the related risk,” he said, referring to work done by the Network for Greening the Financial System.

Angelini acknowledged that signs of fatigue on the green transition are emerging in various jurisdictions and sectors, but argued that, given the challenges, ebbs and flows can be expected. Be that as it may, he does not anticipate problems for central banks, as their roles are limited to addressing climate-related issues within their institutional mandates, such as overseeing financial intermediaries and ensuring financial stability.