Green Inflation: Is It Really a Threat to Green Energy Transition?

EV Batteries as Example of Green Inflation

What is Green Inflation?

Green Inflation (also known as Greenflation) can be understood as the rise in components or materials and energy prices due to efforts to transition to green/renewable energy (decarbonization). This rise can happen because of the rise in demand for those resources, especially during the transition period.

For example, producing batteries for Electric Vehicles (EVs) requires a significant amount of metals such as lithium, cobalt, and nickel. However, new mines for those metals might require another 5-10 years to open. In the meantime, those prices are almost certain to be priced higher to reflect the insufficient supply amidst exponential growth in demand.

It is important to note that other factors can contribute to this inflation, too, such as the effects of climate change (“climateflation”) and the price increase of fossil fuels (“fossilflation”). According to Isabel Schnabel, Member of the Executive Board of the ECB, both of these have a more significant and less subtle impact on inflation than green inflation itself. (European Central Bank, 2022)

Why is This a Big Deal?

Yellow Vests Protest in France

The sudden increase interrupted the downward trend in the cost of renewable energy technologies over the past decade. According to ERG, an Italian energy company, this increase is not just a temporary effect of current inflationary trends but is also expected to have lasting impacts and can impact the use of regulatory tools, such as auctions.

“Inflationary dynamics, once established, tend to persist for several years,” the company wrote in its LinkedIn article. 

In the context of general economics, green inflation is also hurting households and companies who are simply trying to make ends meet but are hindered by the price increase of technologies that they are not able to afford yet. An example of this in practice can be seen in the Yellow Vests protest movement in France in 2018. The trigger is carbon taxes, which, despite making sense from an environmental point of view, have caused petrol prices to rise. (Gagey, 2022)

Opinions on Green Inflation

Opinions on Green Inflation and how to address it seem to differ depending on the region.

ECB Showed Concerns about Green Inflation

Sentiments in Europe

In Europe, solutions revolve around the adjustment of monetary policies to better accommodate the everchanging situation of the green energy transition.

ERG, for example, pushed for the reformation of the auction system to make it more flexible and competitive and to assign its management to technical institutions. 

The European Central Bank, through Isabel Schnabel, proposed at a panel on “Monetary Policy and Climate Change” at The ECB and its Watchers XXII Conference to:

1. increase the inflation target, and 

2. exclude energy prices from central banks’ measures of inflation.

A Differing Outlook

Geopolitics Affect Inflation More In The West

In contrast, Jeremy Lawson (Chief Economist, ABRDN Research Institute) and Ken Akintewe (Head of Asian Sovereign Debt - Fixed Income - Asia) opined that fears about green inflation were overblown. 

They argued that the narrative around green inflation was being driven by what was happening in the West, citing factors such as the Russian invasion of Ukraine (highlighting the fragility of global supply chains) and the inflation problem in the US due to an overstimulated economy post-pandemic (as opposed to due to climate policies). They also mentioned that inflation, as a whole, was far lower across Asia Pacific, where climate policy was at a much earlier stage and there weren’t the same constraints on fossil fuels.

The Green Inflation Dilemma

Will Green Energy Transition be Slowed Down by Inflation?

Green Inflation poses a whole new dimension of choice on us—individuals, businesses, and governments alike—in regards to decarbonization and efforts towards green energy transition. Do we choose to prioritize social justice or the environmental emergency?

Athénaïs Gagey for Philonomist succinctly put it best. “Must we sacrifice today’s poorest members of society for future generations? Or postpone environmental responsibility to preserve everyone’s purchasing power?”

References:

ERG. (2023, February 14). Greenflation: What is it and What Does it Mean for Renewable Energy Development? Linkedin.com. https://www.linkedin.com/pulse/greenflation-what-does-mean-renewable-energy-development-erg-spa/ 

European Central Bank. (2022). A new age of energy inflation: climateflation, fossilflation and greenflation. https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220317_2~dbb3582f0a.en.html 

Gagey, A. (2022, June 29). Greenflation. Philonomist. https://www.philonomist.com/en/kezako/greenflation 

Global Bridges e.V. (n.d.). Green inflation. Global Bridges. Retrieved January 23, 2024, from https://globalbridges-forum.org/green-inflation/