The climate crisis meets the ECB: tinkering around the edges or paradigm shift?

In recent years, the European Central Bank (ECB) has integrated climate considerations into its policy framework. This paper assesses whether the ECB’s approach adequately responds to the challenges posed by the climate crisis. I identify three transformative implications of the climate crisis for the ECB: (i) the diminishing effectiveness of traditional monetary policy tools in controlling inflation; (ii) the growing necessity for the ECB to actively support decarbonisation in line with the EU’s net-zero targets; and (iii) the insufficiency of traditional risk exposure approaches to address financial instability arising from physical climate risks. I examine the extent to which these implications are reflected in the ECB’s climate actions and plans, arguing that a significant gap exists between the ECB’s ‘tinkering around the edges’ approach and the systemic transformation of central banking required in the climate crisis era. Drawing on post-Keynesian and critical macro-finance perspectives, I develop the theoretical foundations of a climate-aligned central banking paradigm and explore its implications for the ECB’s policy toolbox and mandate.