In any case, the ECB’s medium-term orientation of our price stability objective provides us with some leeway to see through transitory energy-driven increases in headline inflation. Beyond energy prices, non-energy prices – and hence core inflation – would not be isolated from the impact of climate policies either. To the extent that carbon-intense producers of non-energy goods and services pass the costs of rising carbon taxes and other interventions on to their consumers, we could also see sizeable upward pressure in core inflation. All in all, persistent upward pressure on, or substantial volatility in, headline inflation stemming from sustained climate policies could lead us to rethink how we formulate our policies in pursuit of price stability over the medium-term horizon. Climate change and the natural interest rate More indirectly, but no less importantly, climate change and the remedial actions needed to tackle it could affect central banks' ability to achieve price stability through their impact on the so-called natural interest rate2, which is an important benchmark for inflation-targeting central banks when setting our interest rates. 2  The natural interest rate is the level of real interest rates consistent with aggregate output being at its potential level and inflation stable at its target. 2  Natural interest rates in advanced economies, including the euro area, have declined in recent decades, reflecting structural shifts in the balance between aggregate saving and investment. The literature attributes this decline mostly to three main factors: a decline in trend productivity growth, demographic developments and a scarcity of safe assets.

Clearly, more time and analysis will be needed before we have better answers for this important question. Our role in climate policy action Let me now turn to the second theme of my talk, namely what financial supervisors and regulators, and central banks could or should do to assist governments in tackling climate change within our mandates. I will start with an important reminder. The main responsibility for addressing climate change resides with governments – namely, fiscal and environmental authorities– because they have the most effective tools and the legitimacy to do so. There is some consensus in the  3  literature that the most effective measure would be to apply Pigouvian taxes3 to carbon emissions. The latter, if well-designed, would lead agents to internalise the social cost of their carbon emissions, inducing a change in the relative prices of energy inputs and final outputs in favour of less carbon-intensive ones. That said, preventing climate change requires a holistic approach that involves all policies. Careful analysis should be devoted to the interactions of the various policy instruments in the economic sectors affected by transition and physical risks. The final aim should be to define an adequate “climate policy mix” that ensures the optimal achievement of environmental targets. In this context, and as part of our main responsibility to guarantee the stability of the financial system, we - regulatory and supervisory authorities - must ensure that the materialisation of climate risks does not endanger financial stability.