Inflation and Climate Change

From a Google Image Search – Crypto News

While there is plenty of speculation and finger pointing about inflation and what is driving up prices, very little has been said in our most frequently consulted media sources about what adjusting to the realities of reversing or stopping climate change will do to prices and the economy. In his fiction book, The Ministry of the Future, Kim Stanley Robinson introduced us to extreme heating events, how they are related to climate change and how they tell us that global warming has already become an existential threat to life on earth as we know it. He also predicts ways the global economy might have to change if we leave fossil fuels behind. 

Bill Gates in his book, How to Avoid a Climate Disaster, offers a more incremental plan to get to zero carbon emissions but does not really discuss the domestic or the global economy or inflation, perhaps because he wants to say that if we do this carefully and thoughtfully, we can still do this with minimum impact on how we live and how we do business. We really ought to listen to his Breakthrough Energy Ventures findings if we want to at least try to avoid major economic impacts.

If Americans think gas and oil prices are too high right now after a two-year pandemic that halted the world economy, then what will they do as we try to shift energy sources and real fossil fuel inflation hits? Will we squeal and blame, will government help subsidize the switch over, can we take the blows and adjust for the sake of everyone’s grandchildren or even the survival of living things on this planet? Even if things get dystopian here on planet earth, I’m sure some microorganisms will survive, perhaps even those that caused our current pandemic.

In his article, The Drama Behind the Inflation Story, W. Owens writing at tremr.com reminds us that price gouging justified by losses during the pandemic is a main cause of the inflation we are seeing in the 2021 holiday season. There is, he agrees, a supply chain backlog and that is also causing inflation, but he says:

“Most important to the scenario is big business’s purposeful raising of prices using the real but convenient excuse of supply chain shortages. Retailers have decided that the best way to recover profits quickly from the pandemic downturn is to stretch the limits of price hikes betting that consumers will go along.” 

Owens goes in to say this about oil and gas prices:

“Shell oil reported a revenue loss from 2019’s  16.5 billion to 4.85 billion in 2020 , a 71% drop. The apparent reason was lower demand, so what happened to the oil stockpiles if that is the case? With this year’s higher demand, lower prices should accompany market demand, not higher prices, unless we place blame where it should be, supply manipulation by oil companies.”

We will soon see if the inflation we are seeing now is temporary or here to stay, but this particular post-pandemic period of inflation most likely has nothing to do with climate change. Replacing fossil fuels with alternative energies that do not cause carbon dioxide to build up in our atmosphere could happen like the magic trick where a magician pulls a tablecloth out from under all the dishes on the table without disturbing a single place setting. There could be a planned, smooth, and incremental approach, but most likely we have waited too long and the alternative energy sources we have so far are unlikely to answer all our energy needs. Finding the perfect mix of available energy sources and finding ways to remove excess carbon presents us with a giant-size puzzle that requires focus and cooperation. These are traits the world is often short of, and it seems that just when we most need them, they are least likely to materialize.

For the Nerds

Here is what some of the experts who have the tools to analyze the economic impacts have to say about these speculative matters of how climate change and climate change strategies could affect inflation in the ‘mid-term’ (their limit on predictions).

First from a paper published on Vox, CEPR Policy Portal (https://voxeu.org):

Central banks are not the primary actors in the fight for preventing climate change, but they can play an important supporting role and have been paying increasingly closer attention to its impacts. For example, the ECB has a climate action plan following the recent conclusion of its review of monetary policy strategy (Drudi et al., 2021), and the Network for Greening the Financial System has grown from the eight founding members in 2017 to over 100 members and observers today. [Yet the implications of climate change on inflation have received surprisingly little attention in the literature].

The article lists “three main channels through which climate change can affect central bank’s primary mandate of price stability:

  1. Global warming is associated with a greater incidence of damaging climatic events.
  2. The transition to a net zero carbon emission world may imply, at least for some time, sharp increases in the price of carbon, in turn affecting consumer prices.
  3. Higher temperatures themselves may dampen economic activity and reduce labor productivity.

The conclusions drawn:

“We find that higher temperatures over recent decades have played a non-negligible role in driving price developments into the medium term and especially for emerging economies. Climate change, in other words, is already starting to bear on the primary mandate of central banks, although for advanced economies it does not yet appear to play a major role. Overall, this provides some empirical basis for central banks to contribute to global efforts to combat climate change, which is rooted in their primary mandate.”

This article can be found at:

https://voxeu.org/print/72504

The article also has a useful bibliography of related articles.

The ICAEW published an article on September 28, 2021, entitled “Will acting on climate change push up inflation – or would not acting be worse?” (Institute of Chartered Accountants in England and Wales)

Larry Fink, the chief executive of Blackrock said recently, “If our solution is 

entirely just to get to a green world, we’re going to have much higher inflation, because we do not have the technology to do all this yet. That’s going to be a big policy issue going forward.”

Roger Bootle, founder of Capital Economic, told Bloomberg recently, “If I had to put my money on a single factor that was going to push up costs in the years to come, I would say it was the environmental emphasis and in particular the drive towards net zero. I think this is going to lead to a whole series of costs and price increases across the economy.”

“A recent report issued by an umbrella body representing central banks conceded that, while early action was needed to prevent much worse long term economic outcomes, it would push up inflation. The Network for Greening the Financial System said that an orderly transition to net zero by 2050 could lead to some increase in global GDP, and lower unemployment relative to prior trends.”

The article ends on this note: “Acting on climate change, for which there is no alternative, also comes with a big bill attached, however. It is a bill that governments have been unwilling to inflict on voters so far. When they do so, it will look and feel like we have moved into an era of permanently higher inflation. It is one of several reasons to wonder whether the low inflation of the past three decades can last.”  

https://www.icaew.com/technical/financial-services/2021/will-acting-on-climate-change-push-up-inflation-or-would-not-acting-be-worse

For a deeper analysis that is not quite as recent (June 18, 2021) look into this Bloomberg article by Rachel Morison:

https://www.bloomberg.com/news/articles/2021-06-18/the-climate-change-fight-is-adding-to-the-global-inflation-scare

A graph shows the Swiss Re Institutes results from a Climate Economics Index Stress Test:

https://www.weforum.org/agenda/2021/06/impact-climate-change-global-gdp/

Conclusions:

It seems as if common knowledge and street level wisdom is as good at predicting the relationship between climate change and inflation as the experts are. Economics is hardly an exact science. It has some rules to help economists make educated predictions, but the number of variables can be staggering and even the knowledge that economists start from different theories and understandings about economics affects the reliability of predictions. Still, it seems safe, even for novices, to conclude that climate change will have some effects on inflation which could seem onerous at times. These affects could be even greater if we wait until later to implement change. If you are not happy with post-pandemic inflation just wait until the changes that are meant to slow or reverse climate change kick in.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: