Why should the ECB care about the unequal effects of climate change?

8 October 2026

By Daniela Arlia and Rachele Rizzo

The consequences of climate change and the transition to a carbon-neutral economy are not the same for all households, sectors and regions. Droughts, for example, can drive up food prices. This hits low-income households harder than others, as they spend a larger share of their income on essentials like food. Owners of energy-efficient homes may see the value of their properties increase, but homes in flood-prone areas may lose value.^[1] These unequal effects matter for the ECB and other central banks because, if nothing is done to mitigate them, they can amplify and prolong economic shocks.

To illustrate this, think of a region dependent on coal mining: if coal is phased out as a source of energy, many firms and workers could be affected at the same time. If local employment opportunities are reduced, this could further weaken businesses, services and housing markets in the area. These cumulative effects may make it harder for the region to adapt. In more diversified regions, on the other hand, workers may find alternative employment opportunities more easily, which would help the local economy to recover after a transition shock.

While the effects of climate-related shocks may initially be concentrated in specific regions, they can spill over to the wider economy through labour, product and financial market linkages, with implications for economic activity, inflation and financial stability. Additionally, if transition policies are perceived as unfair, public support for them may weaken. This can result in policy uncertainty and stop-and-go dynamics that increase the risk of a disorderly transition, with adverse consequences for economic activity and financial stability. It is also important to recall that the costs of inaction in the face of climate risks are higher than the costs of transitioning and can further exacerbate inequalities.^[2]

Figure 1 highlights six main transmission channels through which climate change and transition policies could increase disparities and affect price and financial stability.^[3]

Figure 1

Transmission channels relevant for price and financial stability

Food and energy prices play an important role in shaping inflation expectations. If they are pushed up by policy changes or adverse climate events, this will weigh particularly heavily on lower-income households. This may increase their credit risk and, if the price increases become persistent, reduce their spending on other goods and services.^[4] Moreover, higher food and energy costs may fuel higher wage demands, adding to inflationary pressures.

Natural hazards can push up food and energy prices by disrupting supply chains. However, different regions are affected in different ways. Some areas face more frequent and severe events than others, and some depend more on climate-sensitive sectors such as agriculture or energy-intensive activities.^[5] Moreover, after a transition shock, regions that rely heavily on energy-intensive industries could experience lower labour demand and weaker investment. This could increase their credit risk and loan defaults.^[6]

Climate change also affects firms and workers unevenly. Heatwaves, like those often recorded in recent summers, reduce productivity. Research suggests that such effects may widen existing regional disparities and hit smaller firms harder.^[7] Climate policies such as carbon pricing also have asymmetric consequences. Workers in more emissions-intensive occupations may bear a greater share of the adjustment costs, as the move away from carbon-intensive activities can reduce the demand for labour in those sectors, so that workers need to retrain or move to new jobs.^[8]

For most households, their home – if they own one – is their largest asset. This makes household balance sheets particularly sensitive to climate-related risks. Physical climate hazards can depress property and collateral values, especially when extreme events occur repeatedly, while climate transition policies can affect housing prices and rents if newly imposed energy-efficiency requirements put a premium on properties that already meet them.^[9] Lower-income households may be particularly affected by climate-related risks, as they typically have less capacity to finance energy-efficiency investments, absorb higher insurance costs, undertake adaptation measures to shield their property from natural hazards or relocate to less exposed areas.

Land values tend to rise in areas where physical climate risks are lower and land is scarce. By contrast, regions facing environmental degradation or weakening economic prospects may see stagnating or falling land values as people and firms move away.

Financial assets are also exposed to climate risks. For example, firms in sectors hit by transition shocks may experience changes in expectations about their future profitability – making it harder for them raise the funds to invest in cleaner technologies.

These uneven effects matter for the ECB not because central banks determine how the costs of climate change or climate transition policies should be distributed, but because such asymmetries can amplify macroeconomic and financial shocks. When losses are concentrated among households, firms or regions with limited capacity to absorb them, local disruptions may spread through labour, housing and financial markets, generating broader economic effects. These spillovers can be particularly significant when the affected sectors or regions play a central role in economic activity.

While some asymmetric effects may fade as households, firms and regions adapt, others could prove more long-lasting. Without adequate policy support and investment, certain workers, sectors and regions may face persistent challenges in face of climate risks and high transition costs. Moreover, if the costs of the transition fall disproportionately on certain groups, public support for climate policies may weaken, increasing uncertainty and potentially slowing the transition itself.

From a central bank perspective, the key issue is not only the size of climate and transition-related shocks, but also whether their effects are temporary or persistent, and how widely they can spread across the economy.^[10] These factors determine the extent to which such shocks affect inflation dynamics and economic activity and are therefore central to the assessment of risks to price and financial stability.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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