Greenflation: Is It An Upward Road to Economic Doom?

Feb 1, 2022
5 min read

In the struggle against climate change, the global population is increasingly confronted with a conundrum. The more the advocacy is for a greener economy, the more expensive it gets, and the less likely it is to live up to its potential of minimizing the worst consequences of global warming.

With sustainability gaining traction across sectors, industries, and regions, we decided to take a deeper look at one of the less-considered but potentially important macroeconomic consequences of increased green investment: inflation.

Greenflation As A Serious Concern For Climate Action

According to Vaibhav Chaturvedi, a researcher at the Council on Energy, Environment, and Water (CEEW), "greenflation," or the expenses associated with turning green, may be a worry in several businesses in the medium term. Materials such as tin, aluminum, copper, nickel, and cobalt, which are required for energy conversion technologies, have seen price increases of 20% to 91% this year. Chaturvedi, on the other hand, regarded the lower cost of financing for "green projects" as offsetting the rise in commodity prices.

According to Harry Boyd Carpenter, managing director for the renewable energy industry and climate change at the European Bank for Reconstruction and Development, overall prices for the business will trend lower because there are minimal impediments to scaling up (EBRD).

According to Allied Industry Research, the worldwide renewable energy market would more than quadruple to approximately $2 trillion by 2030, from $881 billion in 2020.

As a result, they told the Reuters Global Markets Forum last week that growing prices will not pose a long-term threat to renewable energy's economic sustainability. As miners scale up to meet the ever-increasing demand, neither will supplies.

Lack of investment in oil and gas as a result of environmental impact in the market may undoubtedly increase the price of petroleum, according to Steven Desmyter, co-head of responsible investment at Man Group, an investment management business.

He stated in a recent blog post that oil companies' exploration and production investment has dropped as they focus more money on renewables. Because there is no new drilling to assist fulfil demand when demand rises post-pandemic, he predicts that prices will rise.

Desmyter told E&E News in an email that the greenflation phenomenon is still a huge concern in market dynamics in the long run. Green policies may have an impact on the oil industry's basic fundamentals over a certain time if the volume of oil accessible falls before the amount required does.

Green Marketing Comes At A Cost, And Environmentalists Must Pay Attention To It

The executive decision-makers of the corporate world and several investors are fascinated by the interface between environmental, social, and governance (ESG) variables and economic resource performance – not least because, regardless of whether we are looking at independent directors' participation or emissions intensity, sustainability has a clear and realistic link with the truth of the matter.

This current episode of rising prices has a number of well-known reasons. Those voicing the alarm have a variety of motivations, ranging from real economic analysis to ideological efforts to prevent more stimulus expenditure. Beyond the COVID-19 pandemic, however, there's a new dynamic in the equation this time: green policy measures and the broader Environmental, Social, and Governance (ESG) movement for socially responsible investment.

Despite inflation and supply chain interruptions, Gauri Singh, deputy director-general of the International Renewable Electricity Agency (IRENA), stated that lower finance costs contributed to a record output of 260 gigawatts of energy from renewable sources last year.

"Anything that poses a climate danger will not be sold for a low price. The market for renewables, on the other hand, is softening" Singh said.

However, when we are talking about prices rising due to ‘greenflation’, we must keep one thing in mind. Some of these price hikes, according to specialists, are attributable to climate change. Let’s take coal for example.

Coal is more costly since lesser numbers of U.S. miners are supplying enough to fulfill market demand, although steel is more highly-priced partly just because a few steelmakers have hesitant to reactivate unused blast furnaces, fearful of growing output and increasing their greenhouse emissions or carbon footprints. Metals such as copper and nickel have only lately begun to recover from pretty big bull runs fueled by limited supplies to fulfill the needs of the rising renewable energy industry.

In the meantime, environmentalists emphasize the extremely real-world consequences of climate risks such as storms and severe flooding on distribution networks and argue that increased customer prices should not deter actions that could ensure the earth remains livable for human existence.

What Could Greenflation Do To The Economic Stability Of Renewable Energy?

In an endeavour to profit from the enormous levels of income, manufacturers overproduce and develop surplus production capacity, resulting in inefficient supply allocations. Consequently, inefficiencies and inflation will stifle economic development and can frequently signal the start of an economic downturn.

To put it another way, an overheated economy is one that is growing at an unsustainable rate. Rising inflation rates and an unemployment rate that is lower than the average rate for an economy are the two key symptoms of an overheated economy.

Renewable sources of energy are critical to achieving long-term energy production since they release considerably fewer greenhouse emissions than fossil fuels. The green transition will necessitate the use of fossil fuels, but sources are limited.

Permit fees, labor expenses for installation, and the money spent to attract new clients are all examples of overhead costs that may be lowered through economies of scale.

According to Reuters, growing costs, as well as access to raw materials and supply chain issues for some of the commodities and items required for green projects, will not pose a long-term hazard to renewable energy's economic sustainability.

Greenflation is a danger that extends beyond instances when supply is restricted to reduce its carbon footprint. Scientists are also concerned about a surge in demand for sustainable energy in the United States without sufficient mineral supply to support it.

Instances of Exorbitant Rise In Prices Due To Greenflation

External environmental factors, socioeconomic, and democratic accountability, or ESG, pressure, and transition regulations are possible to induce a supply bottleneck without reducing dependency on fossil fuels, according to many industry experts. Experts, on the other hand, caution against seeing a grim reaper in today's soaring fuel costs.

There's no denying that prices are rising, a sign of the economy's post-pandemic recovery, which is beginning to affect consumers and fuel political mudslinging.

As gas prices reach new highs, natural gas-heated households are projected to have a very costly winter season.

According to the US Energy Information Administration, over half of American families who use gas to warm their homes will face a 30% hike in their energy costs this winter especially in comparison to last. If this winter is 10% colder than the previous one, the cost will increase by 50%.

There are also gas prices, which have risen from near-record lows in 2020, when pandemic lockdowns halted aircraft, paralyzed workplace commutes, and forced leisure cancellations.

As the economy improves, so does the demand for transportation fuel, driving increasing the cost of the fuels used to convey products and people. Crude oil prices have surpassed $80 per gallon for light, sweet crude, nearly doubling from this time last year.

Electric automobiles, solar farms, and wind generators, all of which are essential in the transition away from fossil fuels, demand a variety of minerals. Copper, lithium, cobalt, and nickel, among other minerals, are all in low supply. Module costs in the solar sector have already risen by around 20% this year, with the entire impact projected in 2022, according to rating company Fitch Ratings. According to Fitch, the price rise is mostly due to higher expenses of getting raw materials such as polysilicon, aluminum, and copper.

The idea that more effective energy solutions would come at a higher cost could contribute to higher inflation and might have far-reaching ramifications for businesses, central banks, and governments, and many other organizations throughout the world. As a result of becoming green, we might be likely to witness prolonged price fluctuations, which will, in all its probability, be mostly upwards trending.